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Mitigation of foreign Direct investment risk and hedging


  • Wahl, Jack E.
  • Broll, Udo


Instruments of risk mitigation play an important role in managing country risk within the foreign direct investment (FDI) decision. Our study assesses country risk by state-dependent preferences and introduces futures contracts as a tool of risk mitigation. We show that country risk assessments related to foreign direct investment do not matter if the multinational firm enters currency futures markets. Besides currency risk, multinationals cross-hedge country risk via the derivatives market. This may explain the empirical result, why host country risk is not a significant determinant of FDI (Bevan/Estrin 2004) together with the fact that almost all (92 %) of the world's top 500 companies enter derivatives markets for hedging purposes (ISDA 2008).

Suggested Citation

  • Wahl, Jack E. & Broll, Udo, 2009. "Mitigation of foreign Direct investment risk and hedging," Dresden Discussion Paper Series in Economics 13/09, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
  • Handle: RePEc:zbw:tuddps:1309

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    References listed on IDEAS

    1. Hauser, Frank, 2006. "Country Risk and Foreign Direct Investments in Transition Countries," Munich Dissertations in Economics 4900, University of Munich, Department of Economics.
    2. Sumru G. Altug & Fanny S Demers & Michel Demers, 2007. "Political Risk and Irreversible Investment," CESifo Economic Studies, CESifo, vol. 53(3), pages 430-465, September.
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    4. Barelli, Paulo & Pessôa, Samuel de Abreu, 2003. "Inada conditions imply that production function must be asymptotically Cobb-Douglas," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 477, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    5. Christian Schmidt & Udo Broll, 2009. "Real exchange-rate uncertainty and US foreign direct investment: an empirical analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(3), pages 513-530, October.
    6. Broll, Udo & Wong, Kit Pong, 2002. "Optimal full-hedging under state-dependent preferences," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(5), pages 937-943.
    7. Karni, Edi, 1983. "Risk Aversion for State-Dependent Utility Functions: Measurement and Applications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 637-647, October.
    8. Wolf Wagner, 2007. "International Risk Sharing and Government Moral Hazard," Open Economies Review, Springer, vol. 18(5), pages 577-598, November.
    9. Broll, Udo & Wahl, Jack E. & Wong, Wing-Keung, 2006. "Elasticity of risk aversion and international trade," Economics Letters, Elsevier, vol. 92(1), pages 126-130, July.
    10. Broll, Udo & Wahl, Jack E, 1993. "Multinational Firm, Foreign Production, and Hedging Behaviour," Scottish Journal of Political Economy, Scottish Economic Society, vol. 40(1), pages 116-123, February.
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    12. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
    13. 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 1629-1658, December.
    14. 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.
    15. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December.
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    More about this item


    state-dependency; country risk; foreign direct investment; hedging;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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