Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises

10 Pages Posted: 14 Sep 2007

See all articles by Andreas Röthig

Andreas Röthig

Deutsche Bundesbank

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics

Abstract

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure - caused by balance sheet effects as in Krugman (2000) - and therefore their investments' sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e. hedging) or risk taking (i.e. speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.

Suggested Citation

Röthig, Andreas and Semmler, Willi and Flaschel, Peter, Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises. Australian Economic Papers, Vol. 46, No. 3, pp. 224-233, September 2007. Available at SSRN: https://ssrn.com/abstract=1012172 or http://dx.doi.org/10.1111/j.1467-8454.2007.00315.x

Andreas Röthig (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

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