Export Production, Hedging Exchange Rate Risk: The Duopoly Case

Dresden Discussion Paper in Economics No. 06/08

40 Pages Posted: 22 May 2008

See all articles by Udo Broll

Udo Broll

Dresden University of Technology - Faculty of Economics and Business Management

Jack E. Wahl

University of Dortmund - Department of Business

Christoph Wessel

Technical University of Dortmund

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

Broll, Udo and Wahl, Jack E. and Wessel, Christoph, Export Production, Hedging Exchange Rate Risk: The Duopoly Case (June 8, 2008). Dresden Discussion Paper in Economics No. 06/08, Available at SSRN: https://ssrn.com/abstract=1135677 or http://dx.doi.org/10.2139/ssrn.1135677

Udo Broll (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Jack E. Wahl

University of Dortmund - Department of Business ( email )

WiSo-Pavillon
Otto-Hahn-Str. 6a
Dortmund, 44227
Germany
+49 231 755 5300 (Phone)
+49 231 755 5231 (Fax)

Christoph Wessel

Technical University of Dortmund ( email )

Emil-Figge-Straße 50
Dortmund, 44227
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
198
Abstract Views
2,026
Rank
277,324
PlumX Metrics