Corporate Hedging of Exchange Risk When Foreign Currency Cash Flow Is Uncertain

We analyze hedging policies for a corporation that generates a foreign currency cash flow that is not known with certainty. We obtain an intriguing result that the probability of bankruptcy for a firm that attempts to minimize this probability is lower when there is some uncertainty in the exchange rates than when there is no uncertainty in the exchange rates: the firm reduces the probability of bankruptcy by borrowing more than its financing needs through foreign currency borrowing alone and by investing the excess funds in domestic risk-free securities.

• 저널Management Science · 41(6) · 1083–1090
• 토픽Risk Management in Financial Firms · Accounting
• DOI10.1287/mnsc.41.6.1083
• 저자Bhagwan Chowdhry