Foreign direct investment and forward hedging Export

@article{citeulike:935604, abstract = {This 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.}, author = {Wong, Kit P.}, citeulike-article-id = {935604}, citeulike-linkout-0 = {http://dx.doi.org/10.1016/j.mulfin.2006.01.002}, citeulike-linkout-1 = {http://www.sciencedirect.com/science/article/B6VGV-4JF97HV-1/2/cd5129b1465cb995f30d8218150f36b9}, doi = {10.1016/j.mulfin.2006.01.002}, journal = {Journal of Multinational Financial Management}, keywords = {fdi, fx, hedge}, month = {December}, number = {5}, pages = {459--474}, posted-at = {2006-11-07 17:22:57}, priority = {2}, title = {Foreign direct investment and forward hedging}, url = {http://dx.doi.org/10.1016/j.mulfin.2006.01.002}, volume = {16}, year = {2006} }

TY - JOUR ID - citeulike:935604 L3 - citeulike-article-id:935604 N2 - This 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. IS - 5 JF - Journal of Multinational Financial Management EP - 474 TI - Foreign direct investment and forward hedging VL - 16 SP - 459 KW - fdi KW - fx KW - hedge AU - Wong, Kit PY - 2006/12// UR - http://dx.doi.org/10.1016/j.mulfin.2006.01.002 ER -