This paper provides some justification for the observation that managers hedge transaction and translation risk through financial contracts and not economic risk as recommended by economists. One reason for the observed behavior is uncertainty in the perception of economic risk. If the manager is more heavily penalized for mishedging than rewarded for proper hedging, then uncertainty of perception may induce him not to hedge economic risk. Another reason is that accounting rules may lead to high accounting losses if economic risk is properly hedged by financial contracts.
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