Receivables with the same maturity because the

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receivables with the same maturity because the outstanding payables effectively hedge the exchange rate risk of the outstanding receivables. Equivalently, if the U.S. firm expects to incur ongoing obligations denominated in the same foreign currency in order to meet expenses required to deliver additional products to its customers, then the firm would reduce its short position in the foreign currency futures. In general, if the U.S. firm incurs expenses in the same foreign currency, then the firm would take a short position in the currency futures to hedge its profits measured in the foreign currency. If the U.S. firm incurs all of its expenses in U.S. dollars, but bills its customers in the foreign currency, then the firm would take a position to hedge the outstanding receivables, not just the profit. Another consideration that affects the U.S. exporting firm’s willingness to hedge its exchange rate risk is the impact of depreciation of the foreign currency on the firm’s prices for its products. For a U.S. firm that sets its prices in the foreign currency, the dollar-equivalent price of the firm’s products is reduced when the foreign currency depreciates, so that the firm is likely to find it desirable to increase its short position in currency futures to hedge against this risk. If the U.S. firm is not able to increase the price of its products in the foreign currency due to competition, the depreciation of the foreign currency has an impact on profits similar to the impact of foreign currency depreciation on the U.S. firm’s receivables. 3. The hedge will be much more effective for the gold-producing firm. Prices for distant maturity oil futures contracts have surprisingly low correlation with current prices because convenience yields and storage costs for oil can change dramatically over time. When near-term oil prices fall, there may be little or no change in longer-term prices, since oil prices for very distant delivery generally respond only slightly to changes in the current market for short-horizon oil. Because the correlation between short- and long-maturity oil futures is so low, hedging long term commitments with short maturity contracts does little to eliminate risk; that is, such a hedge eliminates very little of the variance entailed in uncertain future oil prices. In contrast, both convenience yields and storage costs for gold are substantially smaller and more stable; the result is that the correlation between short-term and more distant gold futures prices is substantially greater. In other words, the basis between near and distant maturity gold futures prices is far less variable, so hedging long-term prices with short-term gold contracts results in a substantially greater percentage reduction in volatility.
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