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The Theory of Two-Currency Gambles

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  • William R. Folks, Jr.

    (University of South Carolina)

Abstract

This paper describes a theory of decision making under uncertainty when payoffs are made in two different currencies. It is shown that immediate lotteries can be evaluated consistently using utility functions assessed in either currency. Delayed lotteries subject to the exchange risk may also be evaluated by single currency utility functions; the implications of the use of such functions are discussed. The conditions where a utility function should include the rate of exchange itself are outlined. Finally, the fallacy of the use of risk adjusted exchange rates for specific exchange management operations is discussed.

Suggested Citation

  • William R. Folks, Jr., 1976. "The Theory of Two-Currency Gambles," Management Science, INFORMS, vol. 23(2), pages 204-215, October.
    • Handle: RePEc:inm:ormnsc:v:23:y:1976:i:2:p:204-215
    DOI: 10.1287/mnsc.23.2.204
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