INDIRECT HEDGING OF EXCHANGE-RATE RISK

The purpose of this study is to investigate the impact of exchange rate risk upon export production when the firm cannot engage in a direct forward hedge in the exchange rate. However, there exists a forward market for a domestic financial asset correlated with the exchange rate in question. Exporting firms using such an indirect hedging device to reduce foreign exchange risk do not necessarily increase their output when such unbiased hedging market becomes available. This contrasts with the well-known result in the case of direct hedging.