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Restricted Export Flexibility and Risk Management with Options and Futures

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Author Info

  • Axel F. A. Adam-Müller

    ()
    (University of Lancaster)

  • Kit Pong Wong

    ()
    (School Economics and Finance, University of Hong Kong)

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    Abstract

    This paper examines the production, export and risk management decisions of a risk-averse competitive firm under exchange rate risk. The firm is export flexible in allocating its output to either the domestic market or a foreign market after observing the exchange rate. Export flexibility is restricted by certain minimum sales requirements that are due to long-term considerations. Currency options are sufficient to derive a separation result under restricted export flexibility. Under fairly priced currency futures and options, full hedging with both instruments is optimal. Introducing fairly-priced currency options stimulates production provided that the currency futures market is unbiased.

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    File URL: http://cofe.uni-konstanz.de/Papers/dp02_07.pdf
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    Bibliographic Info

    Paper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 02-07.

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    Length: 25 Pages
    Date of creation: 19 Mar 2002
    Date of revision:
    Handle: RePEc:knz:cofedp:0207

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    Related research

    Keywords: restricted export flexibility; risk management; currency futures; currency options;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Moschini, GianCarlo & Lapan, Harvey E., 1992. "Hedging Price Risk with Options and Futures for the Competitive Firm with Production Flexibility," Staff General Research Papers 10043, Iowa State University, Department of Economics.
    2. Ware, Roger & Winter, Ralph, 1988. "Forward markets, currency options and the hedging of foreign exchange risk," Journal of International Economics, Elsevier, vol. 25(3-4), pages 291-302, November.
    3. Lapan, Harvey E. & Moschini, GianCarlo, 1994. "Futures Hedging Under Price, Basis and Production Risk," Staff General Research Papers 10041, Iowa State University, Department of Economics.
    4. Bagwell, Kyle & Staiger, Robert W., 1989. "The role of export subsidies when product quality is unknown," Journal of International Economics, Elsevier, vol. 27(1-2), pages 69-89, August.
    5. Bagwell, Kyle, 1991. "Optimal Export Policy for a New-Product Monopoly," American Economic Review, American Economic Association, vol. 81(5), pages 1156-69, December.
    6. Franke, Gunter, 1991. "Exchange rate volatility and international trading strategy," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 292-307, June.
    7. Lapan, Harvey E. & Moschini, GianCarlo & Hanson, Steven D., 1991. "Production Hedging and Speculative Decisions with Options and Future Markets," Staff General Research Papers 10810, Iowa State University, Department of Economics.
    8. 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.
    9. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
    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.
    11. Battermann, Harald L. & Braulke, Michael & Broll, Udo & Schimmelpfennig, Jorg, 2000. "The preferred hedge instrument," Economics Letters, Elsevier, vol. 66(1), pages 85-91, January.
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