The Effect of Forward Markets on Multinational Firms

Udo Broll ()

Bulletin of Economic Research, 1992, vol. 44, issue 3, 233-40

Abstract: This paper presents a model of a risk averse multinational firm under exchange rate risk. The firm, which owns and controls assets in two countries, is engaged in production, sales and forward contracting whenever forward markets exist. First, the author investigates the effects of exchange rate uncertainty without any risk sharing markets. It is shown that the firm internalizes missing hedging markets by increasing foreign production and lowering foreign sales. Therefore the firm hedges by repatriating foreign profits in the form of goods. Second, the implications of the existence of forward markets of global market decisions are discussed. It is shown that a separation theorem holds. This does not imply that the multinational firm shifts all the risk into the forward exchange market. Copyright 1992 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1992
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