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Corporate currency hedging and currency crises

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  • Röthig, Andreas
  • Semmler, Willi
  • Flaschel, Peter

Abstract

We examine the impact of corporate currency hedging on economic stability by introducing hedging activity in a Mundell-Fleming-Tobin framework for analyzing currency and financial crises. The ratio between hedged and unhedged firms is modelled depending on firm size as well as hedging costs. The results indicate that, with an increasing fraction of hedged firms in an economy, the magnitude of a crisis decreases and from a specific hedging level onwards currency crises are ruled out. In order to improve corporate risk management access to hedging instruments should be made possible and hedging costs should be reduced.

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Bibliographic Info

Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 27194.

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Date of creation: Apr 2005
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Publication status: Published in Darmstadt Discussion Papers in Economics . 147 (2005-04)
Handle: RePEc:dar:ddpeco:27194

Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/27194/
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Related research

Keywords: Mundell-Fleming-Tobin model; currency crises; currency hedging; hedging costs;

References

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  1. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.
  2. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
  3. Ingo Fender, 2000. "The impact of corporate risk management on monetary policy transmission: some empirical evidence," BIS Working Papers 95, Bank for International Settlements.
  4. Ingo Fender, 2000. "Corporate hedging: the impact of financial derivatives on the broad credit channel of monetary policy," BIS Working Papers 94, Bank for International Settlements.
  5. Peter M. Garber, 1998. "Derivatives in International Capital Flows," NBER Working Papers 6623, National Bureau of Economic Research, Inc.
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Cited by:
  1. Christian Proa~no & Peter Flaschel & Willi Semmler, 2008. "Currency Crises and Monetary Policy in Economies with Partial Dollarization of Liabilities," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(3), pages 14-39, August.

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