International production, investments and borrowing with exchange rate risk and futures markets

Udo Broll and Itzhak Zilcha

No 148, Discussion Papers, Series II from University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy"

Abstract: In this paper we consider a multinational firm under exchange rate risk in a multiperiod model. We analyze the impact of exchange rate uncertainty and the use of currency futures on the risk-averse firm's decisions about home and foreign production. Without any markets for hedging an increase in exchange rate risk lowers foreign investments and output. However, when futures markets exist, the "separation property" holds. Introducing another source of uncertainty, such as the interest rate, which is nondiversifiable, affects the production in both countries, i.e., the separation property does not hold. However, we show that the adverse effect of the missing financial market (to hedge against this additional risk) disappears when international borrowing is available.

Keywords: international production; investments; exchange rate risk; futures markets (search for similar items in EconPapers)
Date: 1991
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Related works:
Journal Article: INTERNATIONAL PRODUCTION, INVESTMENT AND BORROWING WITH EXCHANGE RATE RISK AND FUTURES MARKETS (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kondp2:148

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