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Udo Broll - One of the best experts on this subject based on the ideXlab platform.

  • trade and cross hedging exchange rate risk
    International Economics and Economic Policy, 2015
    Co-Authors: Udo Broll, Kit Pong Wong
    Abstract:

    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.

  • export exchange rate risk and hedging the duopoly case
    German Economic Review, 2011
    Co-Authors: Udo Broll, Jack E. Wahl, Christoph Wessel
    Abstract:

    . 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.

  • International Trade and the Risk Premium in the Currency Forward Market
    Journal of Economic Integration, 1998
    Co-Authors: Bernhard Eckwert, Udo Broll
    Abstract:

    In this paper we present an intertemporal model of the spot and Forward Markets for foreign exchange. We analyze the implications of central bank interventions on the spot Market for the risk premium in the currency Forward Market and discuss the consequences for the allocation of exchange rate risk and for the volume of international trade. As a main result we find that exchange rate volatility does not generate systematic risk and hence does not adversely affect international trade as long as the monetary authorities do not exogenously intervene in the foreign exchange spot Market.

  • The equilibrium risk premium on the Forward Market for foreign currency
    1996
    Co-Authors: Udo Broll, Bernhard Eckwert
    Abstract:

    This paper constructs an intertemporal model of the spot and Forward Markets for foreign exchange and shows that in equilibrium the Forward Market is unbiased, i.e., the Forward rate is equal to the expected spot rate which will prevail in the Market next period. This holds true as long as the monetary authorities do not exogenously intervene in the foreign exchange Market. Our analysis suggests that nominal exchange rate variability can affect the real sector of the economy only if active intervention policies are carried out on the spot exchange Market.

  • indirect hedging of exchange rate risk
    Journal of International Money and Finance, 1995
    Co-Authors: Udo Broll, Jack E. Wahl, Itzhak Zilcha
    Abstract:

    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.

Jack E. Wahl - One of the best experts on this subject based on the ideXlab platform.

  • export exchange rate risk and hedging the duopoly case
    German Economic Review, 2011
    Co-Authors: Udo Broll, Jack E. Wahl, Christoph Wessel
    Abstract:

    . 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.

  • indirect hedging of exchange rate risk
    Journal of International Money and Finance, 1995
    Co-Authors: Udo Broll, Jack E. Wahl, Itzhak Zilcha
    Abstract:

    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.

  • The effect of Forward Markets and currency options on international trade
    1990
    Co-Authors: Udo Broll, Jack E. Wahl
    Abstract:

    This paper presents a model of a competitive risk averse exporting firm under exchange rate uncertainty. If Forward Market contracts are available neither the distribution parameters of the exchange rate nor the degree of the firm's risk aversion have any impact on the export level. But this Separation property does not hold in the case of currency options. It is shown that under some conditions, exports are larger under exchange rate uncertainty in the presence of currency options than they are in the so-called certainty equivalent case, and that exports increase with volatility of the exchange rate provided that risk aversion is not too high.

Itzhak Zilcha - One of the best experts on this subject based on the ideXlab platform.

  • indirect hedging of exchange rate risk
    Journal of International Money and Finance, 1995
    Co-Authors: Udo Broll, Jack E. Wahl, Itzhak Zilcha
    Abstract:

    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.

  • Oligopoly, Uncertain Demand, and Forward Markets
    Journal of Economics and Business, 1990
    Co-Authors: Rafael Eldor, Itzhak Zilcha
    Abstract:

    This paper analyzes the Nash equilibrium behavior of risk-averse oligopolistic firms under uncertain demand. It is shown that in the presence of unbiased Forward Markets the Nash Equilibrium (NE) output increases, that is, Forward Markets enhance competition. Unlike the competitive or monopoly cases, here the introduction of an unbiased Forward Market may result in a (unique) NE in which all the firms are worse off.

Shmuel S. Oren - One of the best experts on this subject based on the ideXlab platform.

  • Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power
    Journal of Regulatory Economics, 2004
    Co-Authors: Rajnish Kamat, Shmuel S. Oren
    Abstract:

    We analyze welfare and distributional properties of a two-settlement system consisting of a spot Market over a two-node network and a single energy Forward contract. We formulate and analyze several models which simulate joint dispatch of energy and transmission resources coordinated by a system operator. The spot Market is subject to network uncertainty, which we model as a random capacity derating of an important transmission line. Using a duopoly model, we show that even for small probabilities of congestion (derating), Forward trading may be substantially reduced, and the Market power mitigating effect of Forward Markets (as shown in Allaz and Vila 1993) may be nullified to a great extent. There is a spot transmission charge reflecting transportation costs from location of generation to a designated hub whose price is the underlying for the Forward contract. This alleviates some of the incentive problems associated with the Forward Market in which spot-Market trading is residual. We find that the reduction in Forward trading is due to the segregation of the Markets in the constrained state, and the absence of natural incentives for generators to commit to more aggressive behavior in the spot Market (the “strategic substitutes” effect). In our analysis, we find that the standard assumption of “no-arbitrage” across Forward and spot Markets leads to very little contract coverage, even for the case with no congestion. We present an alternative view of the Market where limited intertemporal arbitrage enables temporal price discrimination by competing duopolists. In this framework, we assume that all of the demand shows up in the Forward Market (or that the Market is cleared against an accurate forecast of the demand), and the Forward price is determined using a “Market clearing” condition.

  • two settlement systems for electricity Markets under network uncertainty and Market power
    Journal of Regulatory Economics, 2004
    Co-Authors: Rajnish Kamat, Shmuel S. Oren
    Abstract:

    We analyze welfare and distributional properties of a two-settlement system consisting of a spot Market over a two-node network and a single energy Forward contract. We formulate and analyze several models which simulate joint dispatch of energy and transmission resources coordinated by a system operator. The spot Market is subject to network uncertainty, which we model as a random capacity derating of an important transmission line. Using a duopoly model, we show that even for small probabilities of congestion (derating), Forward trading may be substantially reduced, and the Market power mitigating effect of Forward Markets (as shown in Allaz and Vila 1993) may be nullified to a great extent. There is a spot transmission charge reflecting transportation costs from location of generation to a designated hub whose price is the underlying for the Forward contract. This alleviates some of the incentive problems associated with the Forward Market in which spot-Market trading is residual. We find that the reduction in Forward trading is due to the segregation of the Markets in the constrained state, and the absence of natural incentives for generators to commit to more aggressive behavior in the spot Market (the “strategic substitutes” effect). In our analysis, we find that the standard assumption of “no-arbitrage” across Forward and spot Markets leads to very little contract coverage, even for the case with no congestion. We present an alternative view of the Market where limited intertemporal arbitrage enables temporal price discrimination by competing duopolists. In this framework, we assume that all of the demand shows up in the Forward Market (or that the Market is cleared against an accurate forecast of the demand), and the Forward price is determined using a “Market clearing” condition. Copyright Kluwer Academic Publishers 2004

Andre Rossi De Oliveira - One of the best experts on this subject based on the ideXlab platform.

  • trading Forward in the brazilian electricity Market
    International Journal of Energy Economics and Policy, 2013
    Co-Authors: Paulo Cesar Coutinho, Andre Rossi De Oliveira
    Abstract:

    We study the interaction between Forward and spot electricity Markets in a scenario where buyers and sellers are price takers in the Forward Market and trade through Marketers, who play a Cournot game. Our model’s main features come from the Brazilian electricity Market, where a free contract Market coexists with a regulated contract Market, and the spot price is the output of a stochastic dynamic algorithm. We are able to show that the price of energy bought (sold) Forward decreases (increases) with the number of Marketers, and that, as a result, full hedging is achieved in the limit. We also investigate the effects on prices of changes in the number of Market participants and in aggregate consumption and supply, an exercise that yields important policy recommendations for the Brazilian regulator.