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Export production under exchange rate uncertainty

Author

Listed:
  • Broll, Udo
  • Gilroy, B. Michael
  • Lukas, Elmar

Abstract

Given that a multinational enterprise can react flexibly upon exchange rate movements, international trade flows may be interpreted as an option. An enterprise will opt to export if the profits obtained from exporting under given exchange rate developments are greater than if foreign subsidiary sales were opted. Naturally, given negative exchange rate scenario situations, an enterprise will choose not to export. By virtue of a favorable exchange rate situation it may be more advantageous to implement the flexibility given by the inherent option exercise privilege. Interestingly, even taking account of entrepreneurial risk aversion aspects of enterprises, it is demonstrated that situations characterized by enhanced exchange rate volatility may still lead to greater export trade volumes.

Suggested Citation

  • Broll, Udo & Gilroy, B. Michael & Lukas, Elmar, 2008. "Export production under exchange rate uncertainty," Dresden Discussion Paper Series in Economics 08/08, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
  • Handle: RePEc:zbw:tuddps:0808
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    References listed on IDEAS

    as
    1. Gilroy, Bernard Michael & Lukas, Elmar, 2006. "The choice between greenfield investment and cross-border acquisition: A real option approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(3), pages 447-465, July.
    2. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, vol. 90(5), pages 1093-1109, December.
    3. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
    4. Lioui, Abraham & Poncet, Patrice, 2002. "Optimal currency risk hedging," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 241-264, April.
    5. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May.
    6. Kulatilaka, Nalin & Marks, Stephen Gary, 1988. "The Strategic Value of Flexibility: Reducing the Ability to Compromise," American Economic Review, American Economic Association, vol. 78(3), pages 574-580, June.
    7. Franke, Gunter, 1991. "Exchange rate volatility and international trading strategy," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 292-307, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Export; Exchange Rate Volatility; Risk Aversion; Real Option;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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