missing risk sharing markets and the benefits of cross hedging in developing countries abstract we study the impact of exchange rate risk on an exporting firm in a developing country when there is no forward market in the foreign currency however there exists a forward traded cross hedging asset in this country by cross hedging its foreign exchange exposure the firm can increase its economic welfare export production increases and promotes international trade of the developing country if the spot rate of foreign exchange has some regression relationship to the price of the cross hedging asset we extend our results to the case of price as well as initial wealth uncertainty

optimal international hedging in commodity and currency forward markets abstract this paper derives optimal hedging and production rules for an exporting firm which faces both commodity price and foreign exchange rate uncertainty the size of the commodity hedge is independent of the properties of the foreign exchange market however the optimal foreign exchange hedge depends on the commodity hedge and the properties of the commodity forward market the firm s production decision is independent of its objective function if both forward markets exist but depends on the consumption beta of the unhedgeable risks in the absence of one or both of the markets

capital markets the separation property and hedging abstract we consider a risk averse firm facing exchange rate and interest rate uncertainty when international capital markets are accessible the separation property holds however these hedging instruments are not equivalent to creating missing interest rate futures markets

an equilibrium model with involuntary unemployment at flexible competitive prices and wages this paper presents a general equilibrium model in which all prices and quantities transacted are the direct choices of econom ic agents there is no walrasian auctioneer multiple subgame perfect equilibria exist with prices and wages at their walrasian levels among the equilibrium allocations are the walrasian ones but there a re also outcomes in which price and wage taking workers are rationed in the labor market and are unable to sell all the labor they want a t the prevailing wage this involuntary unemployment results from sel f fulfilling expectations of inadequate excess demand as in some inte rpretations of keynes s ideas copyright 1987 by american economic association

exchange rate volatility and exports new empirical evidence from the emerging east asian economies this paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging east asian countries among themselves as well as to 13 industrialised countries we recognise the specificity of the exports between the emerging east asian and industrialised countries and employ a generalised gravity model in the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit root and cointegration tests to verify the long run relationship among the variables the results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging east asian countries in addition the results suggest that the pattern of bilateral exports is influenced by third country variables an increase in the price competitiveness of other emerging east asian countries has a negative impact on a country s exports to a destination market but the magnitude of the impact is relatively small these results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty the results of the gmm iv estimation also confirm the negative impact of exchange rate volatility on exports and suggest that this negative relationship is not driven by simultaneous causality bias

multiple currencies and hedging this paper presents a model of a competitive exporting firm confronting multiple currency risks future markets do not exist for the firm s own currency but do exist between currencies of two countries to which the firm exports its entire output we provide analytical insight into optimal cross hedging and its implications on production and on trade flows we show that the unbiasedness of the cross currency futures market does not imply non random profits furthermore the availability of cross hedging opportunities has no effects on production but does have effects on exports

the behavior of competitive exporting firms under multiple uncertainty evaluates the effect of exchange rate and commodity price uncertainty from cost and production on a competitive risk averse exporting firm s behavior role of forward future markets in the presence of background uncertainty information on the behavior of the firm when missing markets were introduced

optimal hedging by firms with multiple sources of risky revenues abstract we study the hedging behavior of competitive risk averse firms producing under price uncertainty and owning other sources of risky income as well we show that the well known separation property holds when a futures market for the commodity produced is available however unbiased futures market does not imply full hedging by which the firm avoids price risk altogether

risky business multinationals uncertainty and asymmetric insurance a partial equilibrium model is used to examine the international production allocation of a two plant multinational firm that is confronted with uncertainty with respect to foreign sales the firm produces identical products in both plants using firm specific factors the internationally price discriminating multinational has monopoly power in both segmented markets the analysis focuses on how asymmetric insurance facilities between the firm s home and host country influence its international production allocation and level of intra firm trade

exchange rate uncertainty futures markets and the multinational firm abstract we consider a monopolistic risk averse multinational firm which sells and produces at home and abroad under exchange rate uncertainty first we show that the stochastic exchange rate implies higher production and lower sales in the foreign country then we analyze the impact of currency futures markets a separation result is obtained for a multinational firm i e production and the allocation of sales are independent of the distribution of the random exchange rate and of the firm s attitude towards risk we also examine the effect of currency futures on a multinational firm s foreign direct investments in the absence of futures markets we obtain some comparative statics results when risk aversion increases

elasticity of risk aversion and international trade abstract this paper analyzes export production in the presence of exchange rate uncertainty under mean variance preferences we present the elasticity of risk aversion since this elasticity concept permits a distinct investigation of risk and expectation effects on exports counterintutitive results are possible e g although the home currency is revaluating devaluating exports by the firm increase decrease this fact may contribute to the explanation of disturbing empirical results

forward market and international trade many studies on hedging currency risk and international trade 6 14 18 17 have investigated the simultaneous hedging and production decisions with the nonstochastic home and foreign earnings assumption these studies derived a separation theorem which shows that the production decision made by a multinational firm for international trade is independent of the distribution of the exchange rate and dependent only on the forward price the separation theorem has two different implications first although the production decision is shown to depend on the forward price there is still a missing link connecting the trading activity in the forward markets with international trade second exchange rate uncertainty will not have an impact on the level on trade since the forward price can be used by multinational firms as a guide for the expected future spot rate the first implication seems to contradict results by britto 8 and telser 37 demonstrating that futures price has a real impact on resource allocation and production within an economy the second implication is inconsistent with a number of other empirical studies 2 11 12 22 29 that have shown exchange rate uncertainty has an adverse effect on trade and other studies 5 13 that have found exchange rate volatility to have a positive impact on trade although some studies 7 27 do recognize stochastic foreign income in the foreign hedging they ignore the two kinds of issues discussed above thus this paper attempts to investigate the simultaneous decisions for foreign exchange hedging and production under a stochastic assumption of foreign earnings a simple model is developed here to examine a the interaction of forward markets with international trade and b the impact of exchange risk on trade by endogenizing the forward price in a variety of scenarios this paper derives several interesting results under the stochastic foreign income scenario a new foreign exchange hedging rule which incorporates the covariability of foreign earnings and exchange risk is derived further we find that the separation theorem breaks down under such a situation interestingly we are able to show a positive linkage between trading activity in forward markets and export furthermore

economic exposure and integrated risk management most corporate risk management research focuses on particular risk exposures to the exclusion of other interrelated exposures by contrast this study models corporate risk exposures using a multivariate approach integrating the distinct exposures of interest to finance international business and strategy researchers the paper addresses the implications of multivariate modeling for corporate risk management some key methodological issues arising in empirical estimation of corporate economic exposures and directions for research on integrated risk management 1998 john wiley sons ltd

monetary and exchange rate policies for international financial stability a proposal w v ithout a common monetary standard the remarkable integration of western european north american and the industrialized asian economies in both commodity trade and financial flows is less efficient and becoming untenable dissatisfaction with wildly fluctuating relative currency values euphemistically called floating or flexible exchange rates is a prime cause of the resurgence in protectionism in 1986 87 the overvalued yen forced japanese industrialists to close factories retire workers and write off once valuable investments in plant and equipment this parallels what their american counterparts were forced to do between 1981 and 1985 when the dollar suddenly became overvalued similarly the paring down of the british manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979 81 in agriculture japan and european countries are determined to insulate their domestic prices of farm products from unsettling international influences including volatile fluctuations in the yen dollar or mark dollar exchange rates thus unless exchange stability is first achieved the american government s attempt to broaden the general agreement on tariffs and trade to encompass agriculture and services is likely to fail but what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange rate fluctuations although many people

liquidity constrained exporters and trade abstract we present a model of a risk averse exporting firm subject to liquidity constraints we show that preferences and expectations become important for optimum export and hedging decisions only firms that have sufficient financial resources can fully materialize gains from trade

currency hedging and goods trade abstract a puzzle in empirical international finance is the difficulty in finding a large and negative effect of exchange rate volatility on international trade a common explanation is the availability of hedging instruments this paper examines the empirical validity of this explanation using data on over 1000 country pairs which countries have currency hedging instruments is not perfectly observable this paper deals with the problem by specifying an endogenous regime switching regression there are two main findings first there is no evidence in the data to support the validity of the hedging hypothesis second for country pairs with large trade potential exchange rate volatility deters goods trade to an extent much larger than that typically has been documented in the literature without using the switching regression specification

international trade with forward futures markets under exchange rate and price uncertainty abstract the paper examines a risk averse firm s decisions on the level of trade when the exchange rate and the commodity price are uncertain and the extent of forward exchange and commodity futures commitments first we verify the separation theorem and the full double hedging theorem second we investigate the implications of the existence of both forward foreign exchange and commodity futures markets in comparison to the case where only one or no market is available to the firm the second exercise enables us to focus on conditions under which establishing forward futures arrangements promotes international trade

forward and futures markets and the competitive firm under price uncertainty recent remedies for managing the output price risk faced by a competitive firm sometimes include the prescription of hedging this practice usually entails combining spot market sales with trading opportunities in forward or futures markets the forward hedge represents a risk free price the futures hedge offers a risky alternative which arises because of basis the variable relationship between the spot and futures quotations rather than treating forward and futures as mutually exclusive or as perfect substitutes a competitive firm can carefully construct a portfolio which combines spot forward and futures positions holthausen 9 and feder just and sclmitz 5 hereafter fjs initiate an extensive discussion of a risk averse firm which uses futures contracts when faced with an uncertain output price but no basis risk both articles employ general utility and density functions to derive their results their conclusions include independence of the production decision from the probability density of the spot price and the firm s degree of risk aversion extensions of these two articles usually focus on the robustness of the separation conclusion to either the addition of basis or the addition of production uncertainty to the models the risk free characteristic that holthausen and fjs attribute to futures contracts really better describes a forward contract jarrow and oldfield 11 paul heifner and helmuth 17 and many others document the importance of recognizing the unique charapteristics of these two different types of contracts batlin 2 builds on the holthausen and fjs foundation by adding basis risk to his model fjs explicitly qualify their model as applicable to only those commodities with little or no production uncertainty subsequent articles augment their analysis with the condition of stochastic production chavas and pope 3 anderson and danthine 1 marcus and modest 15 ho 8 and grant 6 all include production uncertainty in different permutations of the fundamental model those which simultaneously include both basis and production risk achieve analytical solutions by assuming specific utility or density functions

exchange rate volatility and international trade the purpose of this note is to show that a positive effect of exchange rate volatility on export production has a theoretical basis the key to this claim is that as the exchange rate volatility increases so does the value of the real option to export to the world market higher volatility increases the potential gains from trade this may explain part of the mixed empirical findings regarding the effects of exchange rate risk on international trade

pricing to market in european automobile exports to oecd countries a panel data approach this paper investigates pricing to market behaviour using data for european auto exports the empirical analysis uses forward instead of spot exchange rates cross country and cross product analyses reveal that pricing behaviour depends mainly on the class of product while the country of origin and destination appears as less important furthermore the data do not usually reject the hypothesis of a symmetric response of export prices to depreciations and appreciations of the exporter s currency finally although the point estimates confirm the combined influence of the business cycle and the direction of the exchange rate movements on pricing to market in most cases formal tests seldom provide statistical significance for this result

consumer confidence and economic fluctuations if consumers become pessimistic about the state of the economy can there be a slowdown in output even if their pessimism is not based on economic fundamentals recent macroeconomic models show the answer is yes if there are strategic complementarities and multiple equilibria we investigate the link between consumer confidence and economic fluctuations using vector autoregressions in all models after controlling for economic fundamentals the hypothesis that consumer sentiment does not cause gnp in the granger sense can be rejected variance decompositions suggest that consumer sentiment accounts for between 13 and 26 percent of the innovation variance of gnp

forward markets currency options and the hedging of foreign exchange risk abstract although transactions exposure to foreign exchange risk can be completely hedged in the forward market the same is not true for economic exposure we show that in some cases a portfolio of currency options can be constructed which hedges economic exposure when the firm has ex post production flexibility in the more general case of uncertainty in multiple exchange rates however more elaborate options than those currently available are required to hedge economic risk completely

the derived demand with hedging cost uncertainty in the futures markets this study explores the significance of production technology and other parameters on the employment of inputs and hedging the paper establishes an explicit relationship between the risk as well as prices parameters and the derived demand production and hedging the authors find that the futures price relative to the expected spot price affects the demand for production factors additionally the presence of basis risk determines the impact of prices and risk parameters on the derived demand for inputs production technology is instrumental in fixing the size of the change in the demand given a change in the model s parameters copyright 1992 by royal economic society

exporting firm and forward markets the multiperiod case abstract we consider a model with a competitive risk averse exporting firm who faces uncertain exchanges rates in a multiperiod analysis the capital stock or fixed input has to be determined at the outset while the variable input labor is chosen optimally at the beginning of each period but before the realization of the exchange rate we show that introducing unbiased currency forward markets decreases the capital labor ratio in all periods we also show that such a firm tends to overhedge compared to the one period cases in some cases the introduction of unbiased forward markets results in higher investments and production in all dates

indirect hedging of exchange rate risk abstract the purpose of this study is to investigate the impact of exchange rate risk upon export production when the firm cannot engage in a direct forward hedge in the exchange rate however there exists a forward market for a domestic financial asset correlated with the exchange rate in question exporting firms using such an indirect hedging device to reduce foreign exchange risk do not necessarily increase their output when such unbiased hedging market becomes available this contrasts with the well known result in the case of direct hedging

exchange rate volatility and exports a firm level analysis the relationship between real exports and exchange rate volatility is investigated using panel data analysis at the firm level results indicate that there is no negative or positive relationship between volatility and real exports in addition firm size and level of international activity do not influence the size and significance of the volatility effect on exports however there is some evidence that firms use import revenue to lower their exchange rate exposure

imperfect hedging and export production firms engaged in international operations are highly interested in developing ways to protect themselves from exchange rate risk the incentive for risk management comes from the enormous volatility of the floating foreign exchange rates our study shows that an exporting firm can benefit from hedging exchange rate risks even when no perfect hedge is possible since in reality not every currency is traded in a futures market 7 chap 15 the exporting firm uses futures contracts with other underlying assets whose spot prices are highly correlated with the foreign exchange spot rate in the real world hedging must often be accomplished by using futures contracts on different deliverable instruments such hedging may result in imperfect hedging as shown by anderson and danthine 1 eaker and grant 11 dellas and zilberfarb 9 broll wahl and zilcha 6 it has been shown in recent publications 12 8 15 13 23 16 2 14 5 18 22 that an international firm facing exchange rate risk can eliminate this risk altogether if it can use a currency forward market another financial asset or a portfolio of assets which is perfectly correlated to the exchange rate in the absence of such markets the firm can reduce its income risk by engaging in a hedging activity of assets correlated to the foreign exchange recent studies of firm behavior under exchange rate uncertainty examine the influence of futures markets on the export and hedging decision these papers derive two major theorems one is the separation theorem which states that when futures markets exist the firm s export production decision is determined solely by technology and input output prices including the futures prices this result holds if the gain from the futures contract is perfectly correlated with export revenue the other theorem is the full hedging theorem which asserts that with unbiased futures markets the firm completely avoids exchange rate risk by entering into optimum futures contracts

professors and hamburgers an international comparison of real academic salaries in recent years academic staff unions and associations have argued for higher salaries for academics on the grounds that existing salaries have not kept pace with inflation are well below commercial salaries and most glaringly are much lower than the salaries of their overseas counterparts however most international comparisons are made based on exchange rate conversions which is inappropriate since purchasing power differentials are only reflected in exchange rates in the long term furthermore the volatility of exchange rates makes such conversions highly inaccurate in this chapter we provide a comparison of real academic salaries by converting the nominal salaries in each country to their purchasing power equivalents using the big mac index our results show that real academic salaries are highest in hong kong and singapore relative to the developed countries while hong kong tax and social security deductions are lowest furthermore real salary levels combined with intrinsic considerations such as the quality of life indicate that canada and new zealand are unattractive places for visiting migrating academics while australia and the us are relatively attractive we suggest that our findings could be of use to policy makers and academic unions in salary negotiations as well as academics making relocation decisions

export and hedging decisions under revenue and exchange rate risk a note abstract this note analyzes optimal export and hedging decisions taken by a risk averse exporting firm which simultaneously faces hedgeable exchange rate risk and non hedgeable revenue risk abroad the separation property does not hold exports depend on preferences and expectations revenue uncertainty causes the firm to export less the optimal currency forward position can be divided into three components an expected revenue component a speculative component and a revenue uncertainty component

multiple expectational equilibria under monopolistic competition this paper shows that a monopolistically competitive economy with real investment can have multiple rational expectations equilibria one is associated with entrepreneurs optimistic expectations about future demand another with entrepreneurs pessimism it also shows that an optimistic expectational equilibrium pareto dominates a pessimistic equilibrium an investment subsidy can be beneficial both by reducing the original underinvestment distortion and by changing firms expectations from pessimistic to optimistic the most important assumption is increasing returns to scale and monopolistic competition makes increasing returns consistent with each producer s optimization

in which currency should exporters set their prices this paper studies the choice of price setting currency for an exporter faced with the choice of setting price in his own in the importers or a third currency under exchange rate uncertainty we establish that sufficient conditions on demand and cost functions for exchange rate pass through to be less than unity under certainty are also sufficient conditions for price setting in the importer s currency to yield the highest expected profit under exchange rate uncertainty under the same conditions on demand and cost functions setting price in the importer s currency maximizes expected utility when risk aversion and forward currency markets are introduced

the macroeconomic effects of false announcements suppose that the government were to announce the economy will be booming in six months and this announcement is based on false data what effect would such an announcement have on future aggregate activity this paper employs revisions of the series of leading economic indicators to test the hypothesis that such an announcement would have a positive effect on future activity we find that the evidence is generally consistent with the hypothesis and that for the time period 1976 1988 the expectational shocks measured by these revisions explain over 20 percent of the fluctuation in the quarterly growth rate of industrial production

export flexibility and currency hedging this article studies the behavior of an export flexible firm under exchange rate uncertainty we show 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 preferences and on the underlying uncertainty we further show that the full hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market otherwise export flexibility introduces a convexity into the firm s foreign exchange risk exposure which calls for the use of currency options for hedging purposes

the behavior of an open economy firm under flexible exchange rates most proponents and opponents of floating believe that greater variability of foreign exchange rates will increase uncertainty in international transactions and hence that the volume of international trade and financial flows will be curtailed without well developed facilities for hedging against exchange uncertainty the effects of exchange risk on merchant exporters and importers have been studied by some authors under the assumption of fixed production ethier 1973 clark 1973 hodder 1977 etc others have investigated the production behaviour of an export firm in a static context see for example baron 1976a b however the impact of the greater volatility of exchange rates upon domestic employment and capital accumulation on the one hand and upon international financial transactions on the other has received scant attention in the literature this paper establishes a dynamic model of a small competitive firm which is engaged in domestic production foreign trade through exports of its products and or imports of its inputs and financial transactions in domestic and foreign currencies since the firm faces uncertainty about future exchange rates and future prices of outputs and inputs it attempts to hedge against the risk if it is risk averse a forward foreign exchange market is assumed to exist the firm s decisions on production investment forward contracting and financing which are closely related in the model are based on exogenously given probability distributions of exchange rates and prices the paper is planned as follows section i presents a model of the firm and formulates its objective function and constraints section ii solves its maximization problem and interprets the first order conditions for short run equilibrium in particular three different roles of the firm in the forward exchange or financial market are emphasized pure hedging speculative hedging and pure speculation section iii analyses the dynamic behaviour of a typical open economy firm section iv conducts comparative dynamic exercises of the firm in a long run steady state equilibrium and discusses how exchange rate uncertainty affects the firm s optimal decisions the implications of the purchasing power parity condition are also developed section v summarizes our conclusions