Export Production, Hedging Exchange Rate Risk: The Duopoly Case
Dresden Discussion Paper in Economics No. 06/08
40 Pages Posted: 22 May 2008
Date Written: June 8, 2008
Abstract
This paper studies a Cournot duopoly in international trade so that the firms are exposed to exchange rate risk. A hedging opportunity is introduced by a forward market where the foreign currency can be traded on. We investigate two settings: First we assume that hedging and output decisions are taken simultaneously. We show that hedging is just done for risk managing reasons as it is not possible to use hedging strategically. In this setting the well-known separation result of the competitive firm holds if both firms have the hedging opportunity. In the second setting the hedging decisions are made before the output decisions. We show that hedging is used not only to manage the risk exposure but also as a strategic device. Furthermore we find that no separation result can be stated.
Keywords: Exchange Rate risk, hedging, exports, duopoly
JEL Classification: F10, F11, F30, F31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Value of Information in Efficient Risk Sharing Arrangements
-
Cross-Hedging with Currency Options and Futures
By Eric C. Chang and Kit Pong Wong
-
Optimal Experimentation in Signal Dependent Decision Problems
By Manjira Datta, Leonard J. Mirman, ...
-
Welfare Effects of Transparency in Foreign Exchange Markets: The Role of Hedging Opportunities
By Burkhard Drees and Bernhard Eckwert
-
Optimal Growth and Uncertainty: Learning
By Christos Koulovatianos, Leonard J. Mirman, ...
-
Oligopoly, Uncertain Demand, and Forward Markets
By Rafi (rafael) Eldor and Itzhak Zilcha
-
Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information
By Rohit Rahi and Piero Gottardi