Menu Expand

Restricted Export Flexibility and Risk Management with Options and Forward Contracts

Cite JOURNAL ARTICLE

Style

Adam-Müller, A., Pong Wong, K. Restricted Export Flexibility and Risk Management with Options and Forward Contracts. Credit and Capital Markets – Kredit und Kapital, 39(2), 211-232. https://doi.org/10.3790/ccm.39.2.211
Adam-Müller, Axel F. A. and Pong Wong, Kit "Restricted Export Flexibility and Risk Management with Options and Forward Contracts" Credit and Capital Markets – Kredit und Kapital 39.2, 2006, 211-232. https://doi.org/10.3790/ccm.39.2.211
Adam-Müller, Axel F. A./Pong Wong, Kit (2006): Restricted Export Flexibility and Risk Management with Options and Forward Contracts, in: Credit and Capital Markets – Kredit und Kapital, vol. 39, iss. 2, 211-232, [online] https://doi.org/10.3790/ccm.39.2.211

Format

Restricted Export Flexibility and Risk Management with Options and Forward Contracts

Adam-Müller, Axel F. A. | Pong Wong, Kit

Credit and Capital Markets – Kredit und Kapital, Vol. 39 (2006), Iss. 2 : pp. 211–232

Additional Information

Article Details

Author Details

Axel F. A. Adam-Müller, Lancaster

Kit Pong Wong, Hong Kong

References

  1. Adam, T. R., S. Dasgupta and S. Titman, 2006, Financial constraints, competition and hedging in industry equilibrium. Forthcoming in: Journal of Finance.  Google Scholar
  2. Adam-Müller, A. F. A., 1997, Export and hedging decisions under revenue and exchange rate risk: A note. European Economic Review 41, 1421-1426.  Google Scholar
  3. Arrow, K. J., 1965, Aspects of the theory of risk-bearing. Helsinki, Yrjö Jahnssonin Säätiö.  Google Scholar
  4. Bagwell, K., 1991, Optimal export policy for a new-product monopoly. American Economic Review 81, 1156-1169.  Google Scholar
  5. Bagwell, K. and R. W. Staiger, 1989, The role of export subsidies when product quality is unknown. Journal of International Economics 27, 69-89.  Google Scholar

Abstract

This paper examines the interaction between operational and financial hedging in the context of a risk averse competitive exporting firm under exchange rate uncertainty. The firm is export-flexible in that it makes its export decision after observing the realized spot exchange rate. However, export-flexibility is limited by certain minimum sales requirements due to long-term considerations. This creates a piecewise linear exchange rate exposure. If the firm is allowed to use customized derivatives contracts, its optimal hedge position can be replicated by selling currency forward contracts and call options. If the firm is restricted to use forward contracts as the sole hedging instrument, optimal output is unambiguously smaller. Introducing currency call options thus stimulates production. An extension analyzes more general types of exchange rate exposure. (JEL F31, D21, D81)