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Mitigation of Foreign Direct Investment Risk and Hedging

  • Jack E. Wahl, Udo Broll


    (Dresden University of Technology, Germany)

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    Instruments of risk mitigation play an important role in managing country risk within the foreign direct investment (FDI) decision. Our study assesses country risk by state-dependent preferences and introduces futures contracts as a tool of risk mitigation. We show that foreign direct investment related country risk assessments do not matter if the multinational firm enters currency futures markets. Besides currency risk multinationals cross-hedge country risk via the derivatives market. This may explain the empirical result, why host country risk is not a significant determinant of FDI (Bevan/Estrin 2004) together with the fact that almost all (92 %) of the world’s top 500 companies enter derivatives markets for hedging purposes (ISDA 2008).

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    Article provided by SKEMA Business School in its journal Frontiers in Finance and Economics.

    Volume (Year): 7 (2010)
    Issue (Month): 1 (April)
    Pages: 21-33

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    Handle: RePEc:ffe:journl:v:7:y:2010:i:1:p:21-33
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