Optimal Hedging Policies

TLDR

Hedging foreign currency exposure via forward contracts has attracted significant recent interest. The paper develops a model of value‑maximizing firms using active hedging and derives optimal hedging policies for risk‑averse agents. The authors model value‑maximizing firms’ active hedging and derive optimal policies, focusing on foreign‑exchange hedging through forward contracts.

Abstract

This paper makes contributions in two directions. First, the paper presents a model in which value-maximizing firms pursue active hedging policies. Second, the paper derives optimal hedging policies for risk-averse agents. Whereas the methodology used and the results provided are quite general, this paper deliberately focuses the analysis on hedging foreign exchange exposure through forward contracts on foreign currencies. This emphasis is explained by the fact that hedging foreign currency exposure through forward contracts has been a topic of considerable interest in recent years.