Over the Hedge: Do Exporters Practice Selective Hedging?

What determines exporters’ exchange rate hedging decisions and do exporters attempt to “time the market?” We use a unique longitudinal dataset on firm exports to find the determinants of exporters’ currency hedging choices. Determinants include financial fragility, prior hedging experience, and natural hedge opportunities. We also find that firms alter their hedging ratios when the currency has recently trended in one direction. This behavior is ubiquitous for all but large firms and for all times other than when the exchange rate is near its extreme historical values. These results are consistent with most firms exhibiting (sub-optimal) selective hedging behavior.

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Fabling, Richard & Arthur Grimes. 2015. “Over the Hedge: Do Exporters Practice Selective Hedging?”, Journal of Futures Markets, 35(4), 321–338.