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If the decision you would take depends on the information you receive, then that information has positive value. But if your decision would be the same regardless of what the information tells you, then the information is of zero value.

Someone proved that somewhere, but I can't remember who. (It's someone's theorem). Your example is an application of that theorem to exchange rate uncertainty. If you had information on what the exchange rate would be, you would set the price conditional on that information.

Hedging does not, in your example, eliminate the costs of exchange rate uncertainty. I think I'm right in saying that, if your firm is risk neutral, the opportunity to hedge is of zero value. So when you assume no hedging, you can make that assumption with no loss of generality. The firm will have no benefit from hedging.

Nick: I don't agree. They may be risk neutral, but the payoff may be highly concave. I.e. If they fail to pay their employees because they didn't hedge a collapse of the US dollar, they go broke.

Mike: The firm has a standard portfolio allocation (or asset/liability management) problem. But I don't see why they'd be doing fx prediction any more than any other random person. If they were good at prediction they should be running a hedge fund - but there is no reason why it should be mixed up with an export business.

The firm must have a strategic plan in order to have immediate solutions to these problems. And in addition, with the high value of US dollars that has been the bases of other worldwide currencies, these is indeed a downfall to other firms. This can lead to bankruptcy like what you have written.

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