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Export-Flexible Firms and Forward Markets

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  • Wong Kit Pong

Abstract

This paper examines the production and hedging decisions of an exporting firm under exchange rate uncertainty. The firm is export flexible in that it can distribute its output to either the domestic market or a foreign market, after observing the realized spot exchange rate. The firm is a monopoly in the domestic market but a price-taker in the foreign market. It is shown that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable sport exchange rate. Otherwise, the firm's optimal output depends on its preference and on the underlying exchange rate uncertainty. Furthermore, the export-flexible firm underhedges its exchange rate risk exposure in a currency forward market wherein the forward exchange rate contains a non-positive risk premium. [D21, F31]

Suggested Citation

  • Wong Kit Pong, 2002. "Export-Flexible Firms and Forward Markets," International Economic Journal, Taylor & Francis Journals, vol. 16(3), pages 81-95.
    • Handle: RePEc:taf:intecj:v:16:y:2002:i:3:p:81-95
    DOI: 10.1080/10168730200000022
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    References listed on IDEAS

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    1. Broll, Udo & Wahl, Jack E, 1997. "Export Flexibility and Hedging," Bulletin of Economic Research, Wiley Blackwell, vol. 49(3), pages 205-211, July.
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    9. Broll Udo, 1999. "Export as an Option," International Economic Journal, Taylor & Francis Journals, vol. 13(1), pages 19-26.
    10. Kit Pong Wong, 2001. "Currency Hedging For Export-Flexible Firms," International Economic Journal, Taylor & Francis Journals, vol. 15(1), pages 165-174.
    11. Jack S. K. Chang & Latha Shanker, 1986. "Hedging effectiveness of currency options and currency futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 6(2), pages 289-305, June.
    12. Udo Broll & Bernhard Eckwert, 1999. "Exchange Rate Volatility and International Trade," Southern Economic Journal, John Wiley & Sons, vol. 66(1), pages 178-185, July.
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    Cited by:

    1. Kit Pong Wong, 2003. "Forward Markets and the Behaviour of the Competitive Firm with Production Flexibility," Bulletin of Economic Research, Wiley Blackwell, vol. 55(3), pages 303-310, July.
    2. Kit Pong Wong & Ho Yin Yick, 2004. "Currency Options and Export‐Flexible Firms," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 379-394, October.
    3. Wong, Kit Pong, 2007. "Operational and financial hedging for exporting firms," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 459-470.
    4. Kit Pong Wong, 2007. "Optimal Export And Hedging Decisions When Forward Markets Are Incomplete," Bulletin of Economic Research, Wiley Blackwell, vol. 59(1), pages 67-81, January.

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