Export, Exchange Rate Risk and Hedging: The Duopoly Case

Broll Udo, Wahl Jack E. and Wessel Christoph
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Broll Udo: Technische Universität Dresden,Dresden, Germany
Wahl Jack E.: Technische Universität Dresden,Dresden, Germany
Wessel Christoph: Technische Universität Dresden,Dresden, Germany

German Economic Review, 2011, vol. 12, issue 4, 490-502

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.

Keywords: Exchange rate risk; hedging; exports; duopoly (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1111/j.1468-0475.2011.00531.x

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