Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/101716 
Year of Publication: 
1991
Series/Report no.: 
Diskussionsbeiträge - Serie II No. 148
Publisher: 
Universität Konstanz, Sonderforschungsbereich 178 - Internationalisierung der Wirtschaft, Konstanz
Abstract: 
In this paper we consider a multinational firm under exchange rate risk in a multiperiod model. We analyze the impact of exchange rate uncertainty and the use of currency futures on the risk-averse firm's decisions about home and foreign production. Without any markets for hedging an increase in exchange rate risk lowers foreign investments and output. However, when futures markets exist, the "separation property" holds. Introducing another source of uncertainty, such as the interest rate, which is nondiversifiable, affects the production in both countries, i.e., the separation property does not hold. However, we show that the adverse effect of the missing financial market (to hedge against this additional risk) disappears when international borrowing is available.
Subjects: 
international production
investments
exchange rate risk
futures markets
Document Type: 
Working Paper

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