Mitigation of Foreign Direct Investment Risk and Hedging

Udo Broll Jack E. Wahl ()
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Udo Broll Jack E. Wahl: Dresden University of Technology, Germany

Frontiers in Finance and Economics, 2010, vol. 7, issue 1, 21-33

Abstract: 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 foreign direct investment related country risk assessments 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).

Keywords: state-dependency; country risk; foreign direct investment; hedging. (search for similar items in EconPapers)
JEL-codes: F21 F23 G32 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ffe:journl:v:7:y:2010:i:1:p:21-33

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