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Export, Exchange Rate Risk and Hedging: The Duopoly Case

Author

Listed:
  • Broll Udo

    (Technische Universität Dresden,Dresden, Germany)

  • Wahl Jack E.

    (Technische Universität Dresden,Dresden, Germany)

  • Wessel Christoph

    (Technische Universität Dresden,Dresden, Germany)

Abstract

This paper studies a Cournot duopoly in international trade with firms exposed to exchange rate risk. A hedging opportunity is introduced by a forward market on which one firm can trade the foreign currency.We investigate two settings: First, we assume that hedging and output decisions are taken simultaneously. It is shown that hedging is exclusively done for risk-managing reasons as it is not possible to use hedging strategically. Second, the hedging decision is made before the output decisions. We show that hedging is not only used to manage the risk exposure but also as a strategic device.

Suggested Citation

  • Broll Udo & Wahl Jack E. & Wessel Christoph, 2011. "Export, Exchange Rate Risk and Hedging: The Duopoly Case," German Economic Review, De Gruyter, vol. 12(4), pages 490-502, December.
    • Handle: RePEc:bpj:germec:v:12:y:2011:i:4:p:490-502
    DOI: 10.1111/j.1468-0475.2011.00531.x
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