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This paper extends Lee and Sakong (1997) analyzing the speculative and hedging behavior of a risk-averse and competitive importing firm under exchange rate and price uncertainty to the general case to maximize the expected utility of its profit. I verify that when commodity futures price is biased, the optimal hedging volume in the foreign exchange futures market should be less than the expected dollar profit earned from the speculative behavior in the commodity futures market. It is also supported by the numerical simulation. And I also verify the reason why domestic oil refiners have a very low share of futures trading for hedging. This is because the domestic sales price is closely linked to the cost of imports and therefore they are less exposed to the price risk. |
