Udo Broll

Exchange rate uncertainty, futures markets and the multinational firm

We consider a monopolistic, risk-averse multinational firm which sells and produces at home and abroad under exchange rate uncertainty. First we show that the stochastic exchange rate implies higher production and lower sales in the foreign country. Then we analyze the impact of currency futures markets. A separation result is obtained for a multinational firm, i.e., production and the allocation of sales are independent of the distribution of the random exchange rate and of the firms attitude towards risk. We also examine the effect of currency futures on a multinational firms foreign direct investments. In the absence of futures markets we obtain some comparative statics results when risk aversion increases.

Targeting Sectors for Foreign Capital Inflow in a Small Developing Economy

We argue, in a model with trade and unemployment, that exogenous inflow of foreign capital may deliver the desired result when it flows to a protected intermediate-goods sector. Whether foreign investment should be directed towards an intermediate-goods sector or to a final-goods sector depends on the technological specifications of either type of goods as well as on the existing set of trade policies. Copyright 1997 by Blackwell Publishing Ltd.

Optimal hedging by firms with multiple sources of risky revenues

Abstract We study the hedging behavior of competitive risk-averse firms producing under price uncertainty and owning other sources of risky income as well. We show that the well-known ‘Separation property’ holds when a futures market for the commodity produced is available. However, unbiased futures market does not imply full-hedging by which the firm avoids price risk altogether.

Missing risk sharing markets and the benefits of cross-hedging in developing countries

We study the impact of exchange rate risk on an exporting firm in a developing country when there is no forward market in the foreign currency. However there exists a forward traded asset in this country the price of which is highly correlated to the foreign currency. By indirectly hedging its foreign exchange exposure the firm can increase its economic welfare. Furthermore export production increases and promotes international trade of the developing country if the spot rate of foreign exchange has a regression relationship with the price of the forward traded asset.

Exports and Indirect Hedging of Foreign Currency Risk

We present a model of a risk-averse competitive exporting firm under exchange rate risk. Direct hedging instruments are not available. However, there are domestic assets whose prices are correlated to the foreign currency. We consider a market for futures contracts in these domestic assets and investigate the firms indirect hedging and export policy. It is shown that the availability of many financial instruments correlated with foreign exchange may, under some circumstances, provide the same results as a perfect hedge. JEL Classification Numbers: F21, F31.

Risk Sharing Markets and Export Production

We consider a competitive risk-averse exporting firm, in a two-period framework, facing exchange rate and interest rate uncertainty. We show that the existence of currency forward markets does not guarantee the separation property between real and financial decisions. However, when international capital markets are accessible then the firm’s export production is independent of its attitude towards risk and the joint distribution of the exchange rate and the domestic interest rate.