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Title: |
Export-Flexible Firms and Forward Markets |
| Author: |
Wong, Kit Pong |
| Author
Affiliation: |
U Hong Kong |
| Source: |
International Economic Journal, Autumn 2002, v. 16, no. 3, pp. 81-95 |
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Publication Date: |
Autumn 2002 |
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Abstract: |
This paper
examines the production and hedging decisions of an exporting firm under
exchange rate uncertainty. The firm is export flexible in that it can
distribute its output to either the domestic market or a foreign market,
after observing the realized spot exchange rate. The firm is a monopoly
in the domestic market but a price-taker in the foreign market. It is
shown that the separation theorem holds if selling exclusively in the
domestic market is suboptimal even under the most unfavorable spot
exchange rate. Otherwise, the firm's optimal output depends on its
preference and on the underlying exchange rate uncertainty. Furthermore,
the export-flexible firm underhedges its exchange rate risk exposure in
a currency forward market wherein the forward exchange rate contains a
non-positive risk premium. |
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