Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises

Andreas Röthig, Willi Semmler and Peter Flaschel

No 173, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

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.

Keywords: Mundell-Fleming-Tobin model; foreign-debt financed investment; currency crises; real crises; currency futures; hedging; speculation (search for similar items in EconPapers)
JEL-codes: E32 E44 F31 F34 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-02-01
New Economics Papers: this item is included in nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as: Rothig, A., Semmler, W. and Flaschel, P., 2007, "Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises", Australian Economic Papers, 46(3), 224-233.

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-02/QFR-rp173.pdf (application/pdf)

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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