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Export Flexibility And Currency Hedging

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  • Kit Pong Wong

Abstract

This article studies the behavior of an export-flexible firm under exchange rate uncertainty. We show that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable spot exchange rate. Otherwise, the firm's optimal output depends on its preferences and on the underlying uncertainty. We further show that the full-hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market. Otherwise, export flexibility introduces a convexity into the firm's foreign exchange risk exposure, which calls for the use of currency options for hedging purposes. Copyright 2003 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Kit Pong Wong, 2003. "Export Flexibility And Currency Hedging," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1295-1312, November.
  • Handle: RePEc:ier:iecrev:v:44:y:2003:i:4:p:1295-1312
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    Citations

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    Cited by:

    1. Udo Broll & Kit Wong, 2015. "Trade and cross hedging exchange rate risk," International Economics and Economic Policy, Springer, vol. 12(4), pages 509-520, October.
    2. Kit Wong, 2014. "Production and hedging in futures markets with multiple delivery specifications," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(2), pages 413-421, October.
    3. Wong, Kit Pong, 2006. "The effects of abandonment options on operating leverage and forward hedging," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 72-86.
    4. Udo Broll & Bernhard Eckwert & Kit Pong Wong, 2014. "Transparency and Risk Sharing in International Trade," Manchester School, University of Manchester, vol. 82(6), pages 716-731, December.
    5. repec:eee:ecmode:v:64:y:2017:i:c:p:69-73 is not listed on IDEAS
    6. Broll, Udo & Eckwert, Bernhard, 2011. "Information value, export and hedging," Dresden Discussion Paper Series in Economics 03/11, Technische Universit├Ąt Dresden, Faculty of Business and Economics, Department of Economics.
    7. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.
    8. Meng, Rujing & Wong, Kit Pong, 2007. "Currency hedging for multinationals under liquidity constraints," Journal of Multinational Financial Management, Elsevier, vol. 17(5), pages 417-431, December.
    9. Wong, Kit Pong, 2007. "Operational and financial hedging for exporting firms," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 459-470.
    10. Wong, Kit Pong, 2006. "Foreign direct investment and forward hedging," Journal of Multinational Financial Management, Elsevier, vol. 16(5), pages 459-474, December.
    11. Broll, Udo & Wahl, Jack E., 2011. "Liquidity constrained exporters and trade," Economics Letters, Elsevier, vol. 111(1), pages 26-29, April.
    12. Ariane Breitfelder & Udo Broll & Kit Pong Wong, 2008. "Wages, Employment and Futures Markets," Finnish Economic Papers, Finnish Economic Association, vol. 21(2), pages 118-123, Autumn.
    13. Broll, Udo & Eckwert, Bernhard, 2009. "Modelling information and hedging: The exporting firm," Economic Modelling, Elsevier, vol. 26(5), pages 974-977, September.
    14. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.

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