MULTINATIONAL-ENTERPRISE, EXCHANGE-RATE UNCERTAINTY AND HEDGING

A risk-averse, monopolistic multinational firm is considered which sells and produces at home and abroad under exchange rate uncertainty. First it is shown that a risky exchange rate implies higher intra-firm trade transactions. Then, analyzing the impact of forward markets, a separation result is obtained for a multinational firm: international production and allocation of sales are independent of the exchange rate's distribution and the firm's attitude to risk. The hedging behavior of the firm, however, will depend on these factors.