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Exchange rate uncertainty, futures markets and the multinational firm

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  • Broll, Udo
  • Zilcha, Itzhak

Abstract

We consider a monopolistic, risk-averse multinational firm which sells and produces at home and abroad under exchange rate uncertainty. First we show that the stochastic exchange rate implies higher production and lower sales in the foreign country. Then we analyze the impact of currency futures markets. A separation result is obtained for a multinational firm, i.e., production and the allocation of sales are independent of the distribution of the random exchange rate and of the firm's attitude towards risk. We also examine the effect of currency futures on a multinational firm's foreign direct investments. In the absence of futures markets we obtain some comparative statics results when risk aversion increases.
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Suggested Citation

  • Broll, Udo & Zilcha, Itzhak, 1992. "Exchange rate uncertainty, futures markets and the multinational firm," European Economic Review, Elsevier, vol. 36(4), pages 815-826, May.
    • Handle: RePEc:eee:eecrev:v:36:y:1992:i:4:p:815-826
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    1. Calderon-Rossell, Jorge R, 1985. "Towards the Theory of Foreign Direct Investment," Oxford Economic Papers, Oxford University Press, vol. 37(2), pages 282-291, June.
    2. Eldor, Rafael & Zilcha, Itzhak, 1987. "Discriminating Monopoly, Forward Markets and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 459-468, June.
    3. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    4. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
    5. Robert E. Lipsey, 1989. "The Internationalization of Production," NBER Working Papers 2923, National Bureau of Economic Research, Inc.
    6. Benninga, Simon & Eldor, Rafael & Zilcha, Itzhak, 1985. "Optimal international hedging in commodity and currency forward markets," Journal of International Money and Finance, Elsevier, vol. 4(4), pages 537-552, December.
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