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Hedging speculation, and investment in balance-sheet triggered currency crises

  • Röthig, Andreas
  • Semmler, Willi
  • Flaschel, Peter

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.

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File URL: http://www.download.tu-darmstadt.de/wi/vwl/ddpie/ddpie_168.pdf
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Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 25377.

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Date of creation: Mar 2006
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Publication status: Published in Darmstadt Discussion Papers in Economics . 168 (2006-03)
Handle: RePEc:dar:ddpeco:25377
Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/25377/
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  1. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  2. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
  3. Rui Albuquerque, 2004. "Optimal Currency Hedging," Finance 0405010, EconWPA.
  4. Paul Krugman, 2000. "Crises : the price of globalization?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 75-106.
  5. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December.
  6. Peter Tufano, 1998. "Agency Costs of Corporate Risk Management," Financial Management, Financial Management Association, vol. 27(1), Spring.
  7. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January.
  8. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-71.
  9. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
  10. Fatemi, Ali & Luft, Carl, 2002. "Corporate risk management: Costs and benefits," Global Finance Journal, Elsevier, vol. 13(1), pages 29-38.
  11. Gerald D. Gay & Jouahn Nam, 1998. "The Underinvestment Problem and Corporate Derivatives Use," Financial Management, Financial Management Association, vol. 27(4), Winter.
  12. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1994. "A Framework For Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(3), pages 22-33.
  13. Beatty, Anne, 1999. "Assessing the use of derivatives as part of a risk-management strategy," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 353-357, January.
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