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Export-Flexible Firms And Forward Markets

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Author Info
KIT PONG WONG
Abstract

This paper examines the production and hedging decisions of an exporting firm under exchange rate uncertainty. The firm is export flexible in that it can distribute its output to either the domestic market or a foreign market, after observing the realized spot exchange rate. The firm is a monopoly in the domestic market but a price-taker in the foreign market. It is shown 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 preference and on the underlying exchange rate uncertainty. Furthermore, the export-flexible firm underhedges its exchange rate risk exposure in a currency forward market wherein the forward exchange rate contains a non-positive risk premium. [D21, F31]

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Publisher Info
Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 16 (2002)
Issue (Month): 3 (October)
Pages: 81-95
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Handle: RePEc:taf:intecj:v:16:y:2002:i:3:p:81-95

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  1. Broll, Udo & Wahl, Jack E, 1997. "Export Flexibility and Hedging," Bulletin of Economic Research, Blackwell Publishing, vol. 49(3), pages 205-11, July.
  2. Meese, Richard, 1990. "Currency Fluctuations in the Post-Bretton Woods Era," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 117-34, Winter. [Downloadable!] (restricted)
  3. Viaene, Jean-Marie & Zilcha, Itzhak, 1998. "The Behavior of Competitive Exporting Firms under Multiple Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 591-609, August.
  4. Parsley, David C & Wei, Shang-Jin, 1996. "Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1211-36, November. [Downloadable!] (restricted)
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  5. Kit Pong Wong, 2001. "Currency Hedging For Export-Flexible Firms ," International Economic Journal, Korean International Economic Association, vol. 15(1), pages 165-174, April. [Downloadable!] (restricted)
  6. Broll, Udo & Wong, Kit Pong & Zilcha, Itzhak, 1999. "Multiple Currencies and Hedging," Economica, London School of Economics and Political Science, vol. 66(264), pages 421-32, November. [Downloadable!] (restricted)
  7. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City. [Downloadable!]
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  8. Udo Broll, 1999. "Export As An Option," International Economic Journal, Korean International Economic Association, vol. 13(1), pages 19-26, April. [Downloadable!] (restricted)
  9. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February. [Downloadable!] (restricted)
  10. Adam-Muller, Axel F. A., 1997. "Export and hedging decisions under revenue and exchange rate risk: A note," European Economic Review, Elsevier, vol. 41(7), pages 1421-1426, July. [Downloadable!] (restricted)
  11. Katz, Eliakim & Paroush, Jacob, 1979. "The effect of forward markets on exporting firms," Economics Letters, Elsevier, vol. 4(3), pages 271-274. [Downloadable!] (restricted)
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