International tenders and futures hedging

Donald Lien and Kit Pong Wong
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Donald Lien: Department of Economics, College of Business, University of Texas at San Antonio, San Antonio, TX 78249-0631, USA, Postal: Department of Economics, College of Business, University of Texas at San Antonio, San Antonio, TX 78249-0631, USA
Kit Pong Wong: School of Economics and Finance, University of Hong Kong, Hong Kong, China, Postal: School of Economics and Finance, University of Hong Kong, Hong Kong, China

Managerial and Decision Economics, 2006, vol. 27, issue 7, 587-594

Abstract: This paper examines the optimal bidding and hedging decisions of a risk-averse firm that takes part in an international tender. The firm faces multiple sources of uncertainty: exchange rate risk, risk of an unsuccessful tender, and business risk. The firm is allowed to trade unbiased currency futures contracts to imperfectly hedge its contingent foreign exchange risk exposure. We show that the firm shorts less (more) of the unbiased futures contracts when its marginal utility function is convex (concave) as compared with the case that the marginal utility function is linear. We further show that the curvature of the marginal utility function plays a decisive role in determining the impact of currency futures hedging on the firm's bidding behavior. Sufficient conditions that ensure the firm bids more or less aggressively than in the case without hedging opportunities are derived. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:27:y:2006:i:7:p:587-594

DOI: 10.1002/mde.1276

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