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

Andreas Röthig, Willi Semmler and Peter Flaschel

No 168, Darmstadt Discussion Papers in Economics from Darmstadt University of Technology, Department of Law and Economics

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 F41 (search for similar items in EconPapers)
Date: 2006
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https://www.econstor.eu/bitstream/10419/32058/1/511221908.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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