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Optimum choice of invoice currency with correlated exchange rates-super-†

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  • Mahmudul Anam
  • Ghulam Hussain Anjum
  • Shin-Hwan Chiang

Abstract

In this paper, we revisit optimal choice of invoice currency for an exporting firm in the face of exchange rate uncertainty. We demonstrate that when a vehicle currency is available, the optimum choice depends not only on the volatility of the exchange rates but the covariance between them as well. In particular, we show that when the exchange rates between the exporter and importer currencies on the one hand, and the exporter and the vehicle currency on the other, are positively correlated, vehicle currency becomes an attractive choice. The intuition underlying this novel outcome is that this regime dampens profit variability for the exporter.

Suggested Citation

  • Mahmudul Anam & Ghulam Hussain Anjum & Shin-Hwan Chiang, 2015. "Optimum choice of invoice currency with correlated exchange rates-super-†," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(8), pages 1117-1129, December.
    • Handle: RePEc:taf:jitecd:v:24:y:2015:i:8:p:1117-1129
    DOI: 10.1080/09638199.2015.1010446
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    References listed on IDEAS

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    3. Shabtai Donnenfeld & Alfred Haug, 2003. "Currency Invoicing in International Trade: an Empirical Investigation," Review of International Economics, Wiley Blackwell, vol. 11(2), pages 332-345, May.
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    5. Donnenfeld, Shabtai & Zilcha, Itzhak, 1991. "Pricing of Exports and Exchange Rate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 1009-1022, November.
    6. Lin, Chung-Cheng, 1996. "Why Do Japanese Giant Trading Companies Prefer Foreign Currency to Japanese Yen?: A Supplementary Note," Review of Quantitative Finance and Accounting, Springer, vol. 6(2), pages 161-165, March.
    7. Johnson, Martin & Pick, Daniel, 1997. "Currency Quandary: The Choice of Invoicing Currency under Exchange-Rate Uncertainty," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 118-128, February.
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