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The effect of forward markets and currency options on international trade

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  • Broll, Udo
  • Wahl, Jack E.

Abstract

This paper presents a model of a competitive risk averse exporting firm under exchange rate uncertainty. If forward market contracts are available neither the distribution parameters of the exchange rate nor the degree of the firm's risk aversion have any impact on the export level. But this Separation property does not hold in the case of currency options. It is shown that under some conditions, exports are larger under exchange rate uncertainty in the presence of currency options than they are in the so-called certainty equivalent case, and that exports increase with volatility of the exchange rate provided that risk aversion is not too high.

Suggested Citation

  • Broll, Udo & Wahl, Jack E., 1990. "The effect of forward markets and currency options on international trade," Discussion Papers, Series II 114, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:114
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    References listed on IDEAS

    as
    1. Franke, Günter, 1986. "Exchange rate volatility and international trade: The option approach," Discussion Papers, Series II 12, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
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    3. Eldor, Rafael & Zilcha, Itzhak, 1987. "Discriminating Monopoly, Forward Markets and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 459-468, June.
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    7. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
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