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Title:Hedging, speculation, and investment in balance-sheet triggered currency crises PDF Logo
Authors:Röthig, Andreas
Semmler, Willi
Flaschel, Peter
Issue Date:2006
Series/Report no.:Darmstadt discussion papers in economics 168
Abstract:This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.
Subjects:Mundell-Fleming-Tobin model
foreign-debt financed investment
currency crises
real crises
currency futures
hedging
speculation
JEL:E32
E44
F31
F41
Document Type:Working Paper
Appears in Collections:Darmstadt Discussion Papers in Economics, Inst. f. VWL, TU Darmstadt

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