Optimum choice of invoice currency with correlated exchange rates-super-†

Mahmudul Anam, Ghulam Hussain Anjum and Shin-Hwan Chiang

The Journal of International Trade & Economic Development, 2015, vol. 24, issue 8, 1117-1129

Abstract: In this paper, we revisit optimal choice of invoice currency for an exporting firm in the face of exchange rate uncertainty. We demonstrate that when a vehicle currency is available, the optimum choice depends not only on the volatility of the exchange rates but the covariance between them as well. In particular, we show that when the exchange rates between the exporter and importer currencies on the one hand, and the exporter and the vehicle currency on the other, are positively correlated, vehicle currency becomes an attractive choice. The intuition underlying this novel outcome is that this regime dampens profit variability for the exporter.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jitecd:v:24:y:2015:i:8:p:1117-1129

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DOI: 10.1080/09638199.2015.1010446

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