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Mitigation of Foreign Direct Investment Risk and Hedging

Author

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  • Jack E. Wahl, Udo Broll

    () (Dresden University of Technology, Germany)

Abstract

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).

Suggested Citation

  • Jack E. Wahl, Udo Broll, 2010. "Mitigation of Foreign Direct Investment Risk and Hedging," Frontiers in Finance and Economics, SKEMA Business School, vol. 7(1), pages 21-33, April.
  • Handle: RePEc:ffe:journl:v:7:y:2010:i:1:p:21-33
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    File URL: http://www.ffe.esc-lille.com/papers/Vol7-1ms235Broll.pdf
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    More about this item

    Keywords

    state-dependency; country risk; foreign direct investment; hedging.;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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