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Export Flexibility And Currency Hedging

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  • Kit Pong Wong
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    Abstract

    This article studies the behavior of an export-flexible firm under exchange rate uncertainty. We show that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable spot exchange rate. Otherwise, the firm's optimal output depends on its preferences and on the underlying uncertainty. We further show that the full-hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market. Otherwise, export flexibility introduces a convexity into the firm's foreign exchange risk exposure, which calls for the use of currency options for hedging purposes. Copyright 2003 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 44 (2003)
    Issue (Month): 4 (November)
    Pages: 1295-1312

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    Handle: RePEc:ier:iecrev:v:44:y:2003:i:4:p:1295-1312

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    Cited by:
    1. Broll, Udo & Eckwert, Bernhard, 2009. "Modelling information and hedging: The exporting firm," Economic Modelling, Elsevier, vol. 26(5), pages 974-977, September.
    2. Ariane Breitfelder & Udo Broll & Kit Pong Wong, 2008. "Wages, Employment and Futures Markets," Finnish Economic Papers, Finnish Economic Association, Finnish Economic Association, vol. 21(2), pages 118-123, Autumn.
    3. Wong, Kit Pong, 2007. "Operational and financial hedging for exporting firms," International Review of Economics & Finance, Elsevier, Elsevier, vol. 16(4), pages 459-470.
    4. Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, Elsevier, vol. 15(1), pages 72-86.
    5. Meng, Rujing & Wong, Kit Pong, 2007. "Currency hedging for multinationals under liquidity constraints," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 17(5), pages 417-431, December.
    6. Broll, Udo & Eckwert, Bernhard, 2011. "Information value, export and hedging," Dresden Discussion Paper Series in Economics 03/11, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
    7. Broll, Udo & Wahl, Jack E., 2011. "Liquidity constrained exporters and trade," Economics Letters, Elsevier, vol. 111(1), pages 26-29, April.
    8. Wong, Kit Pong, 2006. "Foreign direct investment and forward hedging," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 16(5), pages 459-474, December.

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