Export, Exchange Rate Risk and Hedging: The Duopoly Case

Бролл, Удо; Wahl, Jack E.; Wessel, Christoph

doi:10.1111/j.1468-0475.2011.00531.x

Cited by 11 publications

(10 citation statements)

References 26 publications

(41 reference statements)

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“…In such cases, firms account for the effect that their hedging decision may have on the market (Brandts et al, 2008;van Eijkel and Moraga-Gonzalez, 2010;Leautier and Rochet, 2014;Le Coq and Orzen, 2006). Ceteris paribus, a larger hedging position of one firm increases the optimal output of this firm and decreases the competitors' optimal output (Allaz, 1992;Allaz and Vila, 1993;Broll et al, 2011). In equilibrium, however, this increases competition: Output increases, and prices decrease.…”

Section: Introductionmentioning

confidence: 99%

Two-Period Duopolies with Forward Markets

2021

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We experimentally consider a dynamic multi-period Cournot duopoly with a simultaneous option to manage financial risk and a real option to delay supply. The first option allows players to manage risk before uncertainty is realized, while the second allows managing risk after realization. In our setting, firms face a strategic dilemma: They must weigh the advantages of dealing with risk exposure against the disadvantages of higher competition. In theory, firms make strategic use of the hedging component, enhancing competition. Our experimental results support this theory, suggesting that hedging increases competition and negates duopoly profits even in a simultaneous setting.

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Section: Introductionmentioning

confidence: 99%

Two-Period Duopolies with Forward Markets

2021

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“…In reality, hedging in markets with imperfect competition is the norm in the profession. Theoretically, the literature provides a rationale for underhedging in imperfectly competitive markets, as in Allaz (1992); Allaz and Vila (1993) or Broll et al (2009Broll et al ( , 2011. 2 In such a setting, hedgers must account for the fact that corporate hedging has an impact on market competition, and consequently they may decide to hedge less to avoid lowering their profits (Le Coq and Orzen, 2006;Brandts et al, 2008;Ferreira et al, 2009;van Eijkel and Moraga-Gonzalez, 2010;Leautier and Rochet, 2014).…”

Section: Introductionmentioning

confidence: 99%

“…Previous literature is restricted to a single shot interaction of players on the output market. For example, the papers by Broll et al (2009) and Broll et al (2011) consider a duopoly under exchange rate risk and provide theoretical evidence for the strategic influence of the hedging opportunity in a sequential setting, but their papers are restricted to a setting in which the participants of the duopoly interact only once on the output market. Equally, the experimental studies by Le Coq and Orzen (2006) and Ferreira et al (2009) analyze similar settings.…”

Section: Introductionmentioning

confidence: 99%

Strategic Corporate Hedging

Cox,

Karam,

Pelster

2016

SSRN Journal

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We consider a dynamic multi-period framework of a Cournot duopoly and introduce a simultaneous hedging and a storage opportunity to allow players to manage risk before and after demand uncertainty is realized. Decision makers face a strategic dilemma: they must weigh the advantages of dealing with their risk exposure and the disadvantages of higher competition. Due to the storage opportunity, our multi-period setting differs from a repetition of the single-shot interaction. In equilibrium, firms consider the strategic impact of the hedging component, which increases competition. We provide supportive evidence of this theory in a laboratory experiment. Our experimental results suggest that the simultaneous hedging device significantly increases competition and negates duopoly profits.

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“…The simultaneous setting without transaction costs is introduced by Eldor and Zilcha (1990) and further analyzed by Broll et al (2011). To study the duopoly case with a simultaneous forward market we introduce a model with two firms that are producing a homoge-…”

Section: The Simultaneous Settingmentioning

confidence: 99%

Implications of financial transaction costs on the real economy: A note

Pelster¹

2014

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113This note studies the influence of a financial transaction tax and transaction costs on the optimal production and hedging strategies of a duopoly. Firms are exposed to demand uncertainty that leads to price risk and can hedge their risk exposure on a forward market. However, the forward position is subject to transaction costs. We investigate two settings: first, we explore the Cournot duopoly with a simultaneous hedging opportunity; second, we analyze the case with a sequential forward market. We show that in both settings transaction costs lead to a less competitive market and that prices increase as the producers limit their output. IntroductionAs a consequence of the recent financial crisis, the European Commission discusses the introduction of a financial transaction tax (FTT). The exchange of shares and bonds would be taxed at a rate of 0.1%, while derivative contracts would be subject to a 0.01% tax rate. We study the impact of such a financial transaction tax and transaction costs in general on the optimal production and corporate hedging decision of a duopoly. We analyze whether the existence of transaction costs influences the market equilibrium. To perform the analysis, we study a Cournot duopoly because many product markets are dominated by only two firms. Firms are exposed to uncertain demand. This demand uncertainty leads to price risk.However, firms are able to hedge their risk exposure on a forward market. We regard a simultaneous setting as well as a sequential setting. We show that in both cases, firms decrease their production level.

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Export, Exchange Rate Risk and Hedging: The Duopoly Case

Cited by 11 publications

References 26 publications

Two-Period Duopolies with Forward Markets

Two-Period Duopolies with Forward Markets

Strategic Corporate Hedging

Implications of financial transaction costs on the real economy: A note

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