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

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Author Info
Andreas Röthig (Institute of Economics, Darmstadt University of Technology and Center for Empirical Marcroeconomics, University of Bielefeld)
Willi Semmler (Center for Empirical Marcroeconomics, University of Bielefeld and New School University New York)
Peter Flaschel (Center for Empirical Marcroeconomics, University of Bielefeld)

Additional information is available for the following registered author(s):

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 Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 173.

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Length: 32
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:uts:rpaper:173

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

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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
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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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. P Krugman & A Venables, 1993. "Intergration," CEP Discussion Papers 0172, Centre for Economic Performance, LSE.
  3. 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)
  4. Paul Krugman, 2000. "Crises : the price of globalization?," Proceedings, Federal Reserve Bank of Kansas City, pages 75-106. [Downloadable!]
  5. Fatemi, Ali & Luft, Carl, 2002. "Corporate risk management: Costs and benefits," Global Finance Journal, Elsevier, vol. 13(1), pages 29-38. [Downloadable!] (restricted)
  6. 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)
  7. 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)
  8. Rui Albuquerque, 2004. "Optimal Currency Hedging," Finance 0405010, EconWPA. [Downloadable!]
  9. 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)
  10. Peter Tufano, 1998. "Agency Costs of Corporate Risk Management," Financial Management, Financial Management Association, vol. 27(1), Spring.
  11. 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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