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Article: Foreign direct investment and forward hedging

TitleForeign direct investment and forward hedging
Authors
KeywordsCurrency forwards
Foreign direct investment
Real options
Issue Date2006
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/mulfin
Citation
Journal Of Multinational Financial Management, 2006, v. 16 n. 5, p. 459-474 How to Cite?
AbstractThis paper examines the behavior of a risk-averse multinational firm (MNF) making investment in a foreign country under exchange rate uncertainty. To hedge the exchange rate risk, the MNF has access to an unbiased currency forward market. Foreign direct investment (FDI) is irreversible and sequential in that the MNF can acquire additional capital after the exchange rate uncertainty is completely resolved. The MNF as such possesses a real (call) option that is rationally exercised whenever the foreign currency has been substantially appreciated relative to the domestic currency. We show that the MNF's optimal initial level of sequential FDI is always lower than that of lumpy FDI, while the expected optimal aggregate level of sequential FDI can be higher or lower than that of lumpy FDI. We further show that the presence of the currency forward market improves the MNF's incentives to make FDI, both ex-ante and ex-post. © 2006 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85632
ISSN
2015 SCImago Journal Rankings: 0.278
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2010-09-06T09:07:24Z-
dc.date.available2010-09-06T09:07:24Z-
dc.date.issued2006en_HK
dc.identifier.citationJournal Of Multinational Financial Management, 2006, v. 16 n. 5, p. 459-474en_HK
dc.identifier.issn1042-444Xen_HK
dc.identifier.urihttp://hdl.handle.net/10722/85632-
dc.description.abstractThis paper examines the behavior of a risk-averse multinational firm (MNF) making investment in a foreign country under exchange rate uncertainty. To hedge the exchange rate risk, the MNF has access to an unbiased currency forward market. Foreign direct investment (FDI) is irreversible and sequential in that the MNF can acquire additional capital after the exchange rate uncertainty is completely resolved. The MNF as such possesses a real (call) option that is rationally exercised whenever the foreign currency has been substantially appreciated relative to the domestic currency. We show that the MNF's optimal initial level of sequential FDI is always lower than that of lumpy FDI, while the expected optimal aggregate level of sequential FDI can be higher or lower than that of lumpy FDI. We further show that the presence of the currency forward market improves the MNF's incentives to make FDI, both ex-ante and ex-post. © 2006 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.subjectCurrency forwardsen_HK
dc.subjectForeign direct investmenten_HK
dc.subjectReal optionsen_HK
dc.titleForeign direct investment and forward hedgingen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=1042-444X&volume=16&spage=459&epage=474&date=2006&atitle=Foreign+Direct+Investment+and+Forward+Hedgingen_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.mulfin.2006.01.002en_HK
dc.identifier.scopuseid_2-s2.0-33750006813en_HK
dc.identifier.hkuros134725en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-33750006813&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume16en_HK
dc.identifier.issue5en_HK
dc.identifier.spage459en_HK
dc.identifier.epage474en_HK
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike935604-

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