Strategic Hedging

Udo Broll (), Peter Welzel () and Kit Pong Wong

Working Paper Series B from Friedrich Schiller University of Jena, School of of Economics and Business Administration

Abstract: For a Cournot duopoly with a foreign firm exporting to the home firm's market hedging against unfavorable shifts in the stochastic spot exchange rate is analyzed. In a two-stage setting with product market and hedging decisions we show that hedging can be used as a strategic device. Under constant and decreasing absolute risk aversion an increase in hedging volume by the foreign firm promotes its exports and lowers the equilibrium output of the home firm. In contrast to the well-known full-hedging result in a perfectly competitive environment, we find that the foreign firm will over-hedge for strategic reasons. Furthermore, the separation result from the literature on hedging under perfect competition no longer holds in the duopoly framework, i.e., equilibrium output levels depend on the preference of the foreign firm and the probability distribution of the spot exchange rate.

Keywords: Exports; Market structure; Hedging (search for similar items in EconPapers)
JEL-codes: F21 F31 (search for similar items in EconPapers)
Date: 1999-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:jen:jenavo:1999-04

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