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The Value of Invoice Currency Choice in a Volatile Exchange Rate Environment

Author

Listed:
  • Pekka Ahtiala

    (University of Tampere, Finland)

  • Yair E. Orgler

    (Tel Aviv University, Israel)

Abstract

The paper explores the conditions whereby an exporter can gain a competitive advantage by offering a buyer a contract with a choice of invoice currencies rather than a single currency, and determines the value of such a choice. The model incorporates accounts-payable management with exchange- risk management, taking into account the forward exchange rate and the seller's assumptions about the buyer's initial foreign exchange position, its expectations about the future spot rate, and its risk premium. It demonstrates how the value of a choice depends on these variables, as well as on the market interest rates in the two currencies, and on the implicit conversion factor that the seller uses in pricing in different currencies.

Suggested Citation

  • Pekka Ahtiala & Yair E. Orgler, 1999. "The Value of Invoice Currency Choice in a Volatile Exchange Rate Environment," Multinational Finance Journal, Multinational Finance Journal, vol. 3(1), pages 1-17, March.
    • Handle: RePEc:mfj:journl:v:3:y:1999:i:1:p:1-17
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    References listed on IDEAS

    as
    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    2. Shapiro, Alan, 1973. "Optimal Inventory and Credit-Granting Strategies under Inflation and Devaluation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(1), pages 37-46, January.
    3. Hakkio, Craig S., 1981. "The term structure of the forward premium," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 41-58.
    4. Ahtiala, Pekka & Orgler, Yair E., 1995. "The optimal pricing of exports invoiced in different currencies," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 61-77, April.
    5. Hekman, Christine R, 1981. "The Effect of Trade Credit on Price and Price Level Comparisons," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 526-532, November.
    6. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
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