Corporate hedging of exchange risk when foreign currency cash flow is uncertain

The paper analyzes hedging policies for a corporation that generates a foreign currency cash flow that is not known with certainty. It obtains an intriguing result that the probability of bankruptcy for a firm that attempts to minimize this probability is lower when there is some uncertainty in the exchange rates than when there is no uncertainty in the exchange rates: the firm reduces the probability of bankruptcy by borrowing more than its financing needs through foreign currency borrowing alone and by investing the excess funds in domestic risk-free securities.