544 / 2024-04-25 20:44:16

Integrated Hedging Strategies for Exchange Rate and Commodity Price Risks

hedging,quantity competition,exchange rate,commodity,risk management,flexibility

We study integrated hedging strategies for exchange rate and commodity price risks in a duopoly setting, where two competing firms produce in their home country but engage in quantity competition in a foreign market. Each firm determines whether to hedge the exchange rate or/and commodity price risks before production. We develop a decomposition framework to capture the value of flexibility when not hedging, risk correlation effect of hedging, and competition effect of hedging. The framework helps us understand how the firms’ hedging choices depend on risk characteristics and competition, and how exchange rate hedging interacts with commodity price hedging.