Restricted Export Flexibility and Risk Management with Options and Futures
AbstractThis 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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Bibliographic InfoPaper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 02-07.
Length: 25 Pages
Date of creation: 19 Mar 2002
Date of revision:
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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