Axel F. A. Adam-Müller () (University of Lancaster) Kit Pong Wong () (School Economics and Finance, University of Hong Kong)
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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Publisher Info
Paper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number
02-07.
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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