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Article: Currency hedging for multinationals under liquidity constraints

TitleCurrency hedging for multinationals under liquidity constraints
Authors
KeywordsCurrency hedging
Liquidity constraints
Multinationals
Issue Date2007
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/mulfin
Citation
Journal Of Multinational Financial Management, 2007, v. 17 n. 5, p. 417-431 How to Cite?
AbstractThis paper examines the impact of liquidity risk on the behavior of a risk-averse multinational firm (MNF) under exchange rate uncertainty in a two-period dynamic setting. The MNF has operations domiciled in the home country and in a foreign country, each of which produces a single homogeneous good to be sold in the home and foreign markets. To hedge the exchange rate risk, the MNF has access to one-period currency futures and option contracts in each period. The MNF is liquidity constrained in that it is obliged to terminate its risk management program in the second period whenever the net loss due to its first-period hedge position exceeds a predetermined threshold level. We show that the MNF optimally sells less (more) and produces more (less) in the foreign (home) country in response to the imposition of the liquidity constraint. We show further that the liquidity constrained MNF optimally uses the currency option contracts in the first period for hedging purposes in general, and opts for a long option position if its utility function is quadratic in particular. © 2007 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85608
ISSN
2015 SCImago Journal Rankings: 0.278
References

 

DC FieldValueLanguage
dc.contributor.authorMeng, Ren_HK
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-09-06T09:07:07Z-
dc.date.available2010-09-06T09:07:07Z-
dc.date.issued2007en_HK
dc.identifier.citationJournal Of Multinational Financial Management, 2007, v. 17 n. 5, p. 417-431en_HK
dc.identifier.issn1042-444Xen_HK
dc.identifier.urihttp://hdl.handle.net/10722/85608-
dc.description.abstractThis paper examines the impact of liquidity risk on the behavior of a risk-averse multinational firm (MNF) under exchange rate uncertainty in a two-period dynamic setting. The MNF has operations domiciled in the home country and in a foreign country, each of which produces a single homogeneous good to be sold in the home and foreign markets. To hedge the exchange rate risk, the MNF has access to one-period currency futures and option contracts in each period. The MNF is liquidity constrained in that it is obliged to terminate its risk management program in the second period whenever the net loss due to its first-period hedge position exceeds a predetermined threshold level. We show that the MNF optimally sells less (more) and produces more (less) in the foreign (home) country in response to the imposition of the liquidity constraint. We show further that the liquidity constrained MNF optimally uses the currency option contracts in the first period for hedging purposes in general, and opts for a long option position if its utility function is quadratic in particular. © 2007 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/mulfinen_HK
dc.relation.ispartofJournal of Multinational Financial Managementen_HK
dc.rightsJournal of Multinational Financial Management. Copyright © Elsevier BV.en_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in <Journal of Multinational Financial Management>. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL 17, ISSUE 5, (2007)] DOI 10.1016/j.mulfin.2007.01.002-
dc.subjectCurrency hedgingen_HK
dc.subjectLiquidity constraintsen_HK
dc.subjectMultinationalsen_HK
dc.titleCurrency hedging for multinationals under liquidity constraintsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=1042-444X&volume=17&spage=417&epage=431&date=2007&atitle=Currency+Hedging+for+Multinationals+under+Liquidity+Constraintsen_HK
dc.identifier.emailMeng, R: meng@hku.hken_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityMeng, R=rp01086en_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.mulfin.2007.01.002en_HK
dc.identifier.scopuseid_2-s2.0-35348819922en_HK
dc.identifier.hkuros138333en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-35348819922&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume17en_HK
dc.identifier.issue5en_HK
dc.identifier.spage417en_HK
dc.identifier.epage431en_HK
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridMeng, R=23978604800en_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike1884637-

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