Jack E. Wahl

International investments and exchange rate risk

In this paper we consider a risk averse multinational firm under exchange rate risk. We analyze the impact of exchange rate risk and of the use of currency forwards upon the firms global market decisions with respect to international firm-specific capital allocation and direct foreign investment. A rise in exchange risk lowers the holdings of foreign real assets provided that there are no external hedging instruments. However, when forward markets exist, the firms optimal holdings of foreign assets are independent of its attitude towards risk. Furthermore we show that direct foreign investments are increasing with the introduction of forward markets if firm-specific capital and direct investments are complementary factors.

Export Production, Hedging Exchange Rate Risk: The Duopoly Case

This paper studies a Cournot duopoly in international trade so that the firms are exposed to exchange rate risk. A hedging opportunity is introduced by a forward market where the foreign currency can be traded on. We investigate two settings: First we assume that hedging and output decisions are taken simultaneously. We show that hedging is just done for risk managing reasons as it is not possible to use hedging strategically. In this setting the well-known separation result of the competitive firm holds if both firms have the hedging opportunity. In the second setting the hedging decisions are made before the output decisions. We show that hedging is used not only to manage the risk exposure but also as a strategic device. Furthermore we find that no separation result can be stated.

Nachfrageunsicherheit Und Risikopolitik Im Duopol (Demand Uncertainty and Risk Policy: The Duopoly Case)

German Abstract: Die vorliegende Arbeit untersucht ein Duopol bei unsicherer Nachfrage unter Risikoaversion. Die Produktion der gesamten Industrie fallt durch die Einfuhrung von Nachfrageunsicherheit; der Marktpreis steigt wegen des schwacheren Wettbewerbs. Damit ist die Veranderung des Gewinns und des erwarteten Nutzens eines Unternehmers nicht eindeutig zu bestimmen. Zwar sinkt der erwartete Nutzen durch die Einfuhrung des Risikos, jedoch kann dieser Effekt durch einen steigenden Gewinn, insbesondere bei wenig risikoaversen Unternehmen, kompensiert werden. Die Einfuhrung eines Terminmarktes mit Basisrisiko kann fur ein Unternehmen von Nachteil sein kann, unabhangig davon, ob der Terminmarkt eine perfekte oder imperfekte Absicherungsmoglichkeit bietet. Dies gilt jedoch nur dann, wenn sich der Terminmarkt in Backwardation befindet oder beide Unternehmen Zugang zu dem Terminmarkt erhalten.English Abstract: The paper studies an duopoly with risk averse firms exposed to demand uncertainty. A risk sharing market is introduced on which firms can trade in goods and services they produce and sell. This provides an analytical framework capable of examining different comparative static results. The model is static; it is assumed that both firms produce the same single output, know their cost functions with certainty, and maximize expected utility of profit.

Options, Trade, and Risk Aversion

This paper studies an international firm which chooses to enter the options market to reduce foreign currency exposure. We show that there is an interaction between trade, exchange rate volatility, and risk aversion. If the volatility of the foreign exchange rate increases, at first, exports will also increase. Only a critical level of risk aversion can hinder this effect. In general, the availability of currency options for hedging purposes stimulates the volume of international trade.