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International tenders and futures hedging

Author

Listed:
  • Donald Lien

    (Department of Economics, College of Business, University of Texas at San Antonio, San Antonio, TX 78249-0631, USA)

  • Kit Pong Wong

    (School of Economics and Finance, University of Hong Kong, Hong Kong, China)

Abstract

This paper examines the optimal bidding and hedging decisions of a risk-averse firm that takes part in an international tender. The firm faces multiple sources of uncertainty: exchange rate risk, risk of an unsuccessful tender, and business risk. The firm is allowed to trade unbiased currency futures contracts to imperfectly hedge its contingent foreign exchange risk exposure. We show that the firm shorts less (more) of the unbiased futures contracts when its marginal utility function is convex (concave) as compared with the case that the marginal utility function is linear. We further show that the curvature of the marginal utility function plays a decisive role in determining the impact of currency futures hedging on the firm's bidding behavior. Sufficient conditions that ensure the firm bids more or less aggressively than in the case without hedging opportunities are derived. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Donald Lien & Kit Pong Wong, 2006. "International tenders and futures hedging," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(7), pages 587-594.
  • Handle: RePEc:wly:mgtdec:v:27:y:2006:i:7:p:587-594
    DOI: 10.1002/mde.1276
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    File URL: http://hdl.handle.net/10.1002/mde.1276
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    References listed on IDEAS

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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    3. Geoffrey Poitras & John Heaney, 1999. "Skewness preference, mean-variance and the demand for put options," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(6), pages 327-342.
    4. Wong, Kit Pong, 2003. "Currency hedging with options and futures," European Economic Review, Elsevier, vol. 47(5), pages 833-839, October.
    5. Lien, Donald & Wong, Kit Pong, 2004. "Optimal bidding and hedging in international markets," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 785-798, September.
    6. Eaker, Mark R. & Grant, Dwight, 1985. "Optimal hedging of uncertain and long-term foreign exchange exposure," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 221-231, June.
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