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Strategic Hedging

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Author Info
Udo Broll, Peter Welzel, Kit Pong Wong

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Abstract

For a Cournot duopoly with a foreign firm exporting to the home firm's market hedging against unfavorable shifts in the stochastic spot exchange rate is analyzed. In a two-stage setting with product market and hedging decisions we show that hedging can be used as a strategic device. Under constant and decreasing absolute risk aversion an increase in hedging volume by the foreign firm promotes its exports and lowers the equilibrium output of the home firm. In contrast to the well-known full-hedging result in a perfectly competitive environment, we find that the foreign firm will over-hedge for strategic reasons. Furthermore, the separation result from the literature on hedging under perfect competition no longer holds in the duopoly framework, i.e., equilibrium output levels depend on the preference of the foreign firm and the probability distribution of the spot exchange rate.

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Paper provided by Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät in its series Working Paper Series B with number 1999-04.

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Date of creation: 01 Sep 1999
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Handle: RePEc:jen:jenavo:1999-04

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Related research
Keywords: Exports; Market structure; Hedging;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F31 - International Economics - - International Finance - - - Foreign Exchange

References listed on IDEAS
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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  2. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February. [Downloadable!] (restricted)
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  3. 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)
  4. Alan Kirman & Louis Phlips, 1996. "Exchange-rate pass-through and market structure," Journal of Economics, Springer, vol. 64(2), pages 129-154, June. [Downloadable!] (restricted)
  5. Broll, Udo & Zilcha, Itzhak, 1992. "Exchange rate uncertainty, futures markets and the multinational firm," European Economic Review, Elsevier, vol. 36(4), pages 815-826, May. [Downloadable!] (restricted)
  6. Collie, D., 1990. "International Trade And Cournot Equilibrium: Existence, Uniqueness And Comparative Statics," The Warwick Economics Research Paper Series (TWERPS) 352, University of Warwick, Department of Economics.
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  7. Rudiger Dornbusch, 1987. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Katz, Eliakim & Paroush, Jacob, 1979. "The effect of forward markets on exporting firms," Economics Letters, Elsevier, vol. 4(3), pages 271-274. [Downloadable!] (restricted)
  9. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November. [Downloadable!] (restricted)
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