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Hedging, Speculation, and Investment in Balance-Sheet triggered Currency Crises

Author

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

Abstract

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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Suggested Citation

  • Röthig, Andreas & Semmler, Willi & Flaschel, Peter, 2007. "Hedging, Speculation, and Investment in Balance-Sheet triggered Currency Crises," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 29840, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:29840
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/29840/
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    Cited by:

    1. Semmler, Willi & Bernard, Lucas, 2012. "Boom–bust cycles: Leveraging, complex securities, and asset prices," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 442-465.
    2. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, March.
    3. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, March.
    4. Chen, Chiou-Wen & Yang, Meizhi, 2024. "The relationship between bureaucratic corruption and financial crisis in an open economy," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1583-1594.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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