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Udo Broll - One of the best experts on this subject based on the ideXlab platform.
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trade and cross hedging Exchange Rate Risk
International Economics and Economic Policy, 2015Co-Authors: Udo Broll, Kit-pong WongAbstract:This paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of Exchange Rate uncertainty. The firm has to cross hedge its Exchange Rate Risk exposure because there is only a forward market between the domestic currency and one foreign country’s currency. When the firm optimally exports to both foreign countries, we show that the firm’s production decision is independent of the firm’s Risk attitude and of the underlying Exchange Rate uncertainty. We show further that the firm’s optimal forward position is depending on whether the two random Exchange Rates are correlated in the sense of expectation dependence. Our results refine the literature on cross-hedging by introducing the expectation dependence structure. The existing of Risk-sharing institutions, such as forward markets, significantly modify the impact of uncertainty on international trade in the economy.
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export Exchange Rate Risk and hedging the duopoly case
German Economic Review, 2011Co-Authors: Udo Broll, Jack E. Wahl, Christoph WesselAbstract:. This paper studies a Cournot duopoly in international trade with firms exposed to Exchange Rate Risk. A hedging opportunity is introduced by a forward market on which one firm can trade the foreign currency. We investigate two settings: First, we assume that hedging and output decisions are taken simultaneously. It is shown that hedging is exclusively done for Risk-managing reasons as it is not possible to use hedging stRategically. Second, the hedging decision is made before the output decisions. We show that hedging is not only used to manage the Risk exposure but also as a stRategic device.
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hedging Exchange Rate Risk with futures and inventories guterwirtschaftliches risikomanagement ein entscheidungsmodell zur lagerpolitik bei unsicherheit german
2009Co-Authors: Jack E. Wahl, Udo BrollAbstract:We present a model of a Risk-averse exporting firm subject to Exchange Rate Risk. The firm enters an unbiased currency futures market to hedge its Exchange Rate Risk exposure. In the real world there are other ways of evading uncertainty, the most common are holding of inventories. We demonstRate that inventories are used to increase expected utility.
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Intra-Firm Trade and Exchange Rate Risk
Trade Growth and Economic Policy in Open Economies, 1998Co-Authors: Udo BrollAbstract:This study presents a model of a Risk–averse multinational firm under Exchange Rate Risk. The multinational firm which owns and controls assets in two countries is engaged in foreign production and sales. It is shown that foreign production is increasing and foreign sales are decreasing when Exchange Rate uncertainty is introduced. The multinational firm hedges its net foreign Exchange exposure by repatriating foreign profits in the form of goods. As a result, higher Exchange Rate volatility increases intra-firm trade.
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Exchange Rate Risk, Export and Hedging
International Journal of Finance & Economics, 1997Co-Authors: Udo BrollAbstract:In an intertemporal model the impact of Exchange Rate Risk on an international firm is studied under the assumption that no forward markets are existing in the foreign currency. However, there is a forward traded financial asset, whose spot price is highly correlated with the random spot Exchange Rate, i.e. regressable on it. The direction of regression for spot and futures prices turns out to be important when the effects of cross hedging are analysed. It is shown that the exporting firm underhedges if the futures market is unbiased. Furthermore, it is demonstRated that the separation property does not hold, i.e. export production and financial decisions cannot be sepaRated from expectations and Risk behaviour. Copyright @ 1997 by John Wiley & Sons, Ltd. All rights reserved.
Kit-pong Wong - One of the best experts on this subject based on the ideXlab platform.
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cross hedging ambiguous Exchange Rate Risk
Journal of Futures Markets, 2017Co-Authors: Kit-pong WongAbstract:This paper examines the behavior of an exporting firm that sells its output to two foreign countries, only one of which has futures and options available for its currency. The firm possesses smooth ambiguity preferences and faces multiple sources of ambiguous Exchange Rate Risk. We show that the separation theorem fails to hold in that the firm's production and export decisions depend on the firm's attitude toward ambiguity and on the incident to the underlying ambiguity. Given that the random spot Exchange Rates are first‐order independent with respect to each plausible subjective distribution, we derive necessary and sufficient conditions under which the full‐hedging theorem applies to the firm's cross‐hedging decisions. When these conditions are violated, we show that the firm includes options in its optimal hedge position. This paper as such offers a rationale for the hedging role of options under smooth ambiguity preferences and cross‐hedging of ambiguous Exchange Rate Risk. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:132–147, 2017
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Cross‐Hedging Ambiguous Exchange Rate Risk
Journal of Futures Markets, 2016Co-Authors: Kit-pong WongAbstract:This paper examines the behavior of an exporting firm that sells its output to two foreign countries, only one of which has futures and options available for its currency. The firm possesses smooth ambiguity preferences and faces multiple sources of ambiguous Exchange Rate Risk. We show that the separation theorem fails to hold in that the firm's production and export decisions depend on the firm's attitude toward ambiguity and on the incident to the underlying ambiguity. Given that the random spot Exchange Rates are first‐order independent with respect to each plausible subjective distribution, we derive necessary and sufficient conditions under which the full‐hedging theorem applies to the firm's cross‐hedging decisions. When these conditions are violated, we show that the firm includes options in its optimal hedge position. This paper as such offers a rationale for the hedging role of options under smooth ambiguity preferences and cross‐hedging of ambiguous Exchange Rate Risk. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:132–147, 2017
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trade and cross hedging Exchange Rate Risk
International Economics and Economic Policy, 2015Co-Authors: Udo Broll, Kit-pong WongAbstract:This paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of Exchange Rate uncertainty. The firm has to cross hedge its Exchange Rate Risk exposure because there is only a forward market between the domestic currency and one foreign country’s currency. When the firm optimally exports to both foreign countries, we show that the firm’s production decision is independent of the firm’s Risk attitude and of the underlying Exchange Rate uncertainty. We show further that the firm’s optimal forward position is depending on whether the two random Exchange Rates are correlated in the sense of expectation dependence. Our results refine the literature on cross-hedging by introducing the expectation dependence structure. The existing of Risk-sharing institutions, such as forward markets, significantly modify the impact of uncertainty on international trade in the economy.
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Hedging of Exchange Rate Risk and regression dependence
1997Co-Authors: Udo Broll, Kit-pong WongAbstract:The paper presents a model of a Risk-averse exporting firm under Exchange Rate Risk. We focus on the economic implications of basis Risk. It is shown that the regression dependence assumptions between spot and futures Exchange Rates are essential in analyzing optimal hedging and export decisions. When the spot Exchange Rate and the futures Exchange Rate are imperfectly correlated we show that the firm adopts an over hedge when the Exchange Rate Risk exposure is convex and an under hedge when the Risk exposure is concave given the unbiasedness of the currency futures market.
Jack E. Wahl - One of the best experts on this subject based on the ideXlab platform.
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export Exchange Rate Risk and hedging the duopoly case
German Economic Review, 2011Co-Authors: Udo Broll, Jack E. Wahl, Christoph WesselAbstract:. This paper studies a Cournot duopoly in international trade with firms exposed to Exchange Rate Risk. A hedging opportunity is introduced by a forward market on which one firm can trade the foreign currency. We investigate two settings: First, we assume that hedging and output decisions are taken simultaneously. It is shown that hedging is exclusively done for Risk-managing reasons as it is not possible to use hedging stRategically. Second, the hedging decision is made before the output decisions. We show that hedging is not only used to manage the Risk exposure but also as a stRategic device.
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hedging Exchange Rate Risk with futures and inventories guterwirtschaftliches risikomanagement ein entscheidungsmodell zur lagerpolitik bei unsicherheit german
2009Co-Authors: Jack E. Wahl, Udo BrollAbstract:We present a model of a Risk-averse exporting firm subject to Exchange Rate Risk. The firm enters an unbiased currency futures market to hedge its Exchange Rate Risk exposure. In the real world there are other ways of evading uncertainty, the most common are holding of inventories. We demonstRate that inventories are used to increase expected utility.
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indirect hedging of Exchange Rate Risk
Journal of International Money and Finance, 1995Co-Authors: Udo Broll, Jack E. Wahl, Itzhak ZilchaAbstract:Abstract The purpose of this study is to investigate the impact of Exchange Rate Risk upon export production when the firm cannot engage in a direct forward hedge in the Exchange Rate. However, there exists a forward market for a domestic financial asset correlated with the Exchange Rate in question. Exporting firms using such an indirect hedging device to reduce foreign Exchange Risk do not necessarily increase their output when such unbiased hedging market becomes available. This contrasts with the well-known result in the case of direct hedging.
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International investments and Exchange Rate Risk
European Journal of Political Economy, 1992Co-Authors: Udo Broll, Jack E. WahlAbstract: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 firm's 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 firm's 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.
Yinwong Cheng - One of the best experts on this subject based on the ideXlab platform.
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Exchange Rate Risk premiums
Journal of International Money and Finance, 1993Co-Authors: Yinwong ChengAbstract:Abstract A state space model which allows for the covariation of Risk premiums and unexpected Rates of depreciation is used to study Exchange Rate Risk premiums. We find that Exchange Rate Risk premiums have a high degree of persistence and the covariance of Risk premiums and unexpected Rates of depreciation is negative. Regressions of the estimated Risk premium on its determinants implied by the equilibrium model of Lucas (1982) show limited support for the model. (JEL F31).
Adrien Verdelhan - One of the best experts on this subject based on the ideXlab platform.
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a habit based explanation of the Exchange Rate Risk premium
2006 Meeting Papers, 2009Co-Authors: Adrien VerdelhanAbstract:This paper presents a fully rational general equilibrium model that produces a time- varying Exchange Rate Risk premium and solves the uncovered interest Rate parity (U.I.P) puzzle. In this two-country model, agents are characterized by slow-moving external habit preferences derived from Campbell & Cochrane (1999). Endowment shocks are i.i.d and real Risk-free Rates are time-varying. Agents can trade across countries, but when a unit is shipped, only a fraction of the good arrives to the foreign shore. The model gives a rationale for the U.I.P puzzle: the domestic investor receives a positive Exchange Rate Risk premium when she is more Risk-averse than her foreign counterpart. Times of high Risk- aversion correspond to low interest Rates. Thus, the domestic investor receives a positive Risk premium when interest Rates are lower at home than abroad. The model is both simulated and estimated. The simulation recovers the usual negative coefficient between Exchange Rate variations and interest Rate differentials. When the iceberg-like trade cost is taken into account, the Exchange Rate variance produced is in line with its empirical counterpart. A nonlinear estimation of the model using consumption data leads to reasonable parameters when pricing the foreign excess returns of an American investor.
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a habit based explanation of the Exchange Rate Risk premium
Computing in Economics and Finance, 2006Co-Authors: Adrien VerdelhanAbstract:This paper presents a fully rational general equilibrium model that produces a time-varying Exchange Rate Risk premium and solves the uncovered interest Rate parity (U.I.P) puzzle. In this two-country model, agents are characterized by slow-moving external habit preferences similar to Campbell & Cochrane (1999). Endowment shocks are i.i.d and real Risk-free Rates are time-varying. Agents can trade across countries, but when a unit is shipped, only a fraction of the good arrives to the foreign shore. The model gives a rationale for the U.I.P puzzle: the domestic investor receives a positive Exchange Rate Risk premium when she is effectively more Risk-averse than her foreign counterpart. Times of high Risk-aversion correspond to low interest Rates. Thus, the domestic investor receives a positive Risk premium when interest Rates are lower at home than abroad. The model is both simulated and estimated. The simulation recovers the usual negative coefficient between Exchange Rate variations and interest Rate differentials. When the iceberg-like trade cost is taken into account, the Exchange Rate variance produced is in line with its empirical counterpart. A nonlinear estimation of the model using consumption data leads to reasonable parameters when pricing the foreign excess returns of an American investor
