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Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises

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Author Info
Andreas Röthig () (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
Willi Semmler () (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld))
Peter Flaschel () (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld))

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Abstract

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure- caused by balance sheet effects as in Krugman (2000) - and therefore their investments' sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.

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Publisher Info
Paper provided by Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology) in its series Darmstadt Discussion Papers in Economics with number 168.

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Length: 32 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:tud:ddpiec:168

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Related research
Keywords: Mundell-Fleming-Tobin model; foreign-debt financed investment; currency crises; real crises; currency futures; hedging; speculation.;

Other versions of this item:

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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.:
  1. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December. [Downloadable!] (restricted)
    Other versions:
  2. Beatty, Anne, 1999. "Assessing the use of derivatives as part of a risk-management strategy," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 353-357, January. [Downloadable!] (restricted)
  3. Stulz, Ren? M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June. [Downloadable!]
  4. Paul Krugman, 2000. "Crises : the price of globalization?," Proceedings, Federal Reserve Bank of Kansas City, pages 75-106. [Downloadable!]
  5. Smith, Clifford W. & Stulz, Ren? M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December. [Downloadable!]
  6. Fatemi, Ali & Luft, Carl, 2002. "Corporate risk management: Costs and benefits," Global Finance Journal, Elsevier, vol. 13(1), pages 29-38. [Downloadable!] (restricted)
  7. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1994. "A Framework For Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(3), pages 22-33. [Downloadable!] (restricted)
  8. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March. [Downloadable!] (restricted)
  9. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January. [Downloadable!] (restricted)
  10. Rui Albuquerque, 2004. "Optimal Currency Hedging," Finance 0405010, EconWPA. [Downloadable!]
    Other versions:
  11. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 743-71. [Downloadable!] (restricted)
  12. Peter Tufano, 1998. "Agency Costs of Corporate Risk Management," Financial Management, Financial Management Association, vol. 27(1), Spring.
  13. Gerald D. Gay & Jouahn Nam, 1998. "The Underinvestment Problem and Corporate Derivatives Use," Financial Management, Financial Management Association, vol. 27(4), Winter.
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