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INTERNATIONAL PRODUCTION, INVESTMENT AND BORROWING WITH EXCHANGE RATE RISK AND FUTURES MARKETS
Author(s) -
Broil Udo,
Zilcha Itzhak
Publication year - 1995
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.1995.tb00727.x
Subject(s) - futures contract , hedge , economics , exchange rate , foreign exchange risk , production (economics) , interest rate parity , investment (military) , currency , interest rate , financial market , monetary economics , financial economics , forward market , multinational corporation , incomplete markets , microeconomics , finance , ecology , politics , law , political science , biology
In this paper we consider a multinational firm under exchange rate and interest rate risks 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 hedging markets exchange rate risk lowers foreign investment 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.