Currency Options and Export-Flexible Firms
AbstractThis paper examines the production and hedging decisions of a globally competitive firm under exchange rate uncertainty. The firm is risk averse and possesses export flexibility in that it can distribute its output to either the domestic market or a foreign market after observing the realized spot exchange rate. To hedge against its exchange rate risk exposure, the firm can trade fairly priced currency call options of an arbitrary strike price. We show that both the separation and the full-hedging results hold if the strike price of the currency call options is set equal to the ratio of the domestic and foreign selling prices. Otherwise, neither result holds. Specifically, we show that the optimal level of output is always less than that of an otherwise identical firm that is risk neutral. Furthermore, an under-hedge (over-hedge) is optimal whenever the strike price of the currency call options is below (above) the ratio of the domestic and foreign selling prices. Copyright Blackwell Publishers Ltd and the Board of Trustees of the Bulletin of Economic Research, 2004.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Wiley Blackwell in its journal Bulletin of Economic Research.
Volume (Year): 56 (2004)
Issue (Month): 4 (October)
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0307-3378
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- F31 - International Economics - - International Finance - - - Foreign Exchange
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Wong, Kit Pong, 2007. "Operational and financial hedging for exporting firms," International Review of Economics & Finance, Elsevier, Elsevier, vol. 16(4), pages 459-470.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.