Hedging speculation, and investment in balance-sheet triggered currency crises

Andreas Röthig, Willi Semmler and Peter Flaschel

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.

Date: 2006-03
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Published in Darmstadt Discussion Papers in Economics . 168 (2006-03)

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Related works:
Working Paper: Hedging speculation, and investment in balance-sheet triggered currency crises (2008)
Journal Article: HEDGING, SPECULATION, AND INVESTMENT IN BALANCE‐SHEET TRIGGERED CURRENCY CRISES* (2007)
Working Paper: Hedging, Speculation, and Investment in Balance-Sheet triggered Currency Crises (2007)
Working Paper: Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises (2006)
Working Paper: Hedging, speculation, and investment in balance-sheet triggered currency crises (2006)
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