Hedging On U.S. Export Pricing: An Exchange Rate Pass-Through Analysis

This paper investigates the impact of hedging activities on U.S. export pricing. A theoretical framework of export pricing model with a hedging component was derived to test the hypothesis via exchange rate pass-through. The hypothesis is that a firm with a high (low) hedging engagement would have a low (normal) degree of exchange rate pass-through, ceteris paribus. Two measurements of the hedging engagement are the hedging amount and the hedging dummy. The result tested with the hedging amount on pass-through supports the hypothesis and suggests the importance of hedging involvement in preventing any uncertainty from exchange rate fluctuations. In addition, the coefficient estimate of the foreign demand elasticity interacting with one-year-lagged exchange rate is significant at one percent. However, the differential effects of different levels of hedging activities on the size of pass-through with the hedging dummy are inconclusive.