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International investments and exchange rate risk

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  • Broll, Udo
  • Wahl, Jack E.

Abstract

In this paper we consider a risk averse multinational firm under exchange rate risk. We analyze the impact of exchange rate risk and of the use of currency forwards upon the firm's global market decisions with respect to international firm-specific capital allocation and direct foreign investment. A rise in exchange risk lowers the holdings of foreign real assets provided that there are no external hedging instruments. However, when forward markets exist, the firm's optimal holdings of foreign assets are independent of its attitude towards risk. Furthermore we show that direct foreign investments are increasing with the introduction of forward markets if firm-specific capital and direct investments are complementary factors.

Suggested Citation

  • Broll, Udo & Wahl, Jack E., 1991. "International investments and exchange rate risk," Discussion Papers, Series II 131, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:131
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    References listed on IDEAS

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    1. Broll, Udo & Zilcha, Itzhak, 1990. "Two-Country Firm: Exchange Rate Uncertainty and Futures Markets," Foerder Institute for Economic Research Working Papers 275483, Tel-Aviv University > Foerder Institute for Economic Research.
    2. Calderon-Rossell, Jorge R, 1985. "Towards the Theory of Foreign Direct Investment," Oxford Economic Papers, Oxford University Press, vol. 37(2), pages 282-291, June.
    3. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    4. Takao Itagaki, 1981. "The Theory of the Multinational Firm under Exchange Rate Uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 14(2), pages 276-297, May.
    5. Benninga, Simon & Eldor, Rafael & Zilcha, Itzhak, 1985. "Optimal international hedging in commodity and currency forward markets," Journal of International Money and Finance, Elsevier, vol. 4(4), pages 537-552, December.
    6. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
    7. 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.
    8. Wilfred J. Ethier, 1986. "The Multinational Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 805-833.
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    Cited by:

    1. Broll, Udo & Wahl, Jack E., 1991. "Hedging with synthetical forwards and the export decision," Discussion Papers, Series II 134, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

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