Uncertain Exchange Rate Research Articles

Narrative as “legal tender”: the semiotic meanings of “exchange” in Malcolm Bradbury’s Rates of Exchange

Abstract Malcolm Bradbury’s novel Rates of Exchange, taking the economic term “rates of exchange” as a central metaphor, depicts various exchanges occurring in the socio-economic landscape of Britain during the 1970s and 1980s. In the context of governmental emphasis on economic development, the novel intricately explores exchanges among diverse entities, playing with multiple meanings of the term “exchange”. In this way, the novel itself becomes a form of “legal tender,” exchanged for reader comprehension, communication, and participation. It highlights the ubiquitous presence of exchange and the risks associated with the uncertain exchange rates between different entities. Furthermore, it invites readers to participate in the story-telling and the nostalgic journey back to British literary tradition. This paper, drawing on Roland Barthes’s semiotic theory along with structuralist and poststructuralist concepts, investigates the multifaceted meanings of “exchange” in the novel. Through this analysis, the paper aims to illuminate the semiotic significance of various narrative forms and the profound thematic concerns in Bradbury’s work.

The Asymmetric Effects of Exchange Rate Volatility on Domestic Investment in Asia

ABSTRACT: Exchange rate volatility is said to affect domestic investment in either direction. An increase in exchange rate volatility can affect domestic investment negatively since risks are higher, mostly due to volatile prices that are the results of exchange rate volatility. Most previous studies assumed that the response is symmetric. However, one study recently demonstrated that the effects of exchange rate volatility on domestic investment could be asymmetric. We add to this new asymmetry literature by assessing the short-run and long-run effects of exchange rate volatility on domestic investment in eight Asian countries. The linear Autoregressive Distributed Lag (ARDL) approach of Pesaran et al. (2001) is used to estimate the symmetric effects of exchange rate volatility on investment. We then follow Shin et al.’s (2014) approach of asymmetric cointegration and error-correction modelling to estimate asymmetric effects of exchange rate volatility on investment. The advantage of using both the approaches is that the variables could be a combination of I(0) and I(1), ruling out pre-unit root testing since these are the properties of almost all macroeconomic variables. Another advantage is that both approaches yield short-run and long-run results in one step. These advanced methods are applied to data from Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, and Thailand. We find that when a traditional linear and symmetric ARDL investment model was estimated for each of the eight countries in our sample, exchange rate volatility had a significant short-run effects on domestic investment in six countries. The short-run effects lasted into significant long-run effects only in the cases for Malaysia and Thailand. However, when a nonlinear model was estimated, the short-run asymmetric effects of volatility were found in all the eight countries. The short-run effects lasted into the long run only for Hong Kong, Indonesia, and Thailand. Clearly, more significant effects of exchange rate volatility were established by estimating a nonlinear model which must be attributed to the nonlinear adjustment of exchange rate volatility. These findings provide policy guidelines to investors in these countries as to how and in which direction exchange rate uncertainty will affect their investment decisions. They can then hedge against uncertain exchange rate volatility and maintain a stable investment environment.

Cross-border valuation using the International CAPM and the constant perpetual growth model

For cross-border valuation to be consistent with the International CAPM (ICAPM), translating projected cash flows across currencies should account for a currency risk premium and the economic interaction between uncertain cash flows and uncertain exchange rates. The conventional translation method ignores these items. This study proposes a translation method that is consistent with the ICAPM, given the constant perpetual growth model of valuation. Using empirical data, the study illustrates the conventional translation method’s potentially substantial valuation error if the ICAPM describes the risk-return trade-off in financial markets.

Pricing of European Currency Options with Uncertain Exchange Rate and Stochastic Interest Rates

Suppose that the interest rates obey stochastic differential equations, while the exchange rate follows an uncertain differential equation; this paper proposes a new currency model. Under the proposed currency model, the pricing formula of European currency options is then derived. Some numerical examples recorded illustrate the quality of pricing formulas. Meanwhile, this paper analyzes the relationship between the pricing formula and some parameters.

International trade and firms' attitude towards risk

This paper examines the optimal production and trade decisions of the domestic firms facing uncertainties owing to the exchange rate volatility under mean-variance preferences. The impact of uncertain exchange rate fluctuations on trade is evaluated in a partial equilibrium framework, using the concept of risk-aversion elasticities. These elasticities measure how sensitive the firms are towards substituting between return and risk at the margin, with respect to changes in the distribution of the spot exchange rate. This simplest possible analytical framework is useful for explicit empirical estimation of risk-aversion elasticities in the literature of international economics.

Integrated Strategic Planning of Global Production Networks and Financial Hedging under Uncertain Demands and Exchange Rates

AbstractIn this paper, we present a multi-stage stochastic programming model that integrates financial hedging decisions into the planning of strategic production networks under uncertain exchange rates and product demands. This model considers the expenses of production plants and the revenues of markets in different currency areas. Financial portfolio planning decisions for two types of financial instruments, forward contracts and options, are represented explicitly by multi-period decision variables and a multi-stage scenario tree. Using an illustrative example, we analyze the impact of exchange-rate and demand volatility, the level of investment expenses and interest rate spreads on capacity location and dimensioning decisions. In particular, we show that, in the illustrative example, the exchange-rate uncertainty cannot be completely eliminated by financial hedging in the presence of demand uncertainty. In this situation, we find that the integrated model can result in better strategic planning decisions for a risk-averse decision maker compared to traditional modeling approaches.

Research on international logistics dynamics with uncertain exchange rate

The movement of exchange rate influences the equilibrium of entire international logistics system. Based on reviewing literature on international logistics optimisation, exchange rate risk and multi-product flow are first attempted to be integrated into international logistics dynamic model. The decision-making purpose of the model is to maximise expectation revenue with psychological anticipation. And then more reliable equilibrium transaction volume and equilibrium transaction price are found out. Using projection gradient algorithms, numerical simulation and stability analysis are presented by MATLAB software. The convergence effect and stability of simulation result prove the validity of multi-product dynamic international logistics system model with uncertain exchange rate.

A comparative study of international automobile sourcing strategies based on stochastic process analysis

In global supply chains, increasing global sourcing costs have urged multinational automotive manufacturing firms to develop competitive international sourcing strategies. Faced with different international sourcing strategies between Original Equipment Manufacturers (OEMs) and suppliers in the automotive industry, this paper focuses on the comparative study of two popular ones (Risk Sharing or RS and Early Commitment or EC) and then tries to find out which of these is a better strategy in different situations. Using the real-options approach, the valuation models of the RS and EC sourcing strategies are established. By means of the binomial lattice technique depicting the uncertain exchange rate factor, we present the numerical simulation and sensitivity analysis of two Stochastic Dynamic Programming (SDP) problems. The results of our comparison analysis suggest that the EC sourcing strategy is better than its RS counterpart, especially when the foreign exchange rate is highly volatile in the global automobile supply chain.

Some implications for monetary policy of uncertain exchange rate pass‐through

AbstractThe paper uses MULTIMOD to examine the implications of uncertain exchange rate pass‐through for the conduct of monetary policy. From the policymaker's perspective, uncertainty about exchange rate pass‐through implies uncertainty about policy multipliers and the impact of state variables on stabilization objectives. When faced with uncertainty about the strength of exchange rate pass‐through, policymakers will make less costly errors by overestimating the strength of pass‐through rather than underestimating it. The analysis suggests that pass‐through uncertainty of the magnitude considered does not result in efficient policy response coefficients that are smaller than those under certainty.

Some Implications for Monetary Policy of Uncertain Exchange Rate Pass-Through

The paper uses MULTIMOD to examine the implications of uncertain exchange rate pass-through for the conduct of monetary policy. From the policymaker's perspective, uncertainty about exchange rate pass-through implies uncertainty about policy multipliers and the impact of state variables on stabilization objectives. When faced with uncertainty about the strength of exchange rate pass-through, policymakers will make less costly errors by overestimating the strength of pass-through rather than underestimating it. The analysis suggests that pass-through uncertainty of the magnitude considered does not result in efficient policy response coefficients that are smaller than those under certainty.

Some Implications for Monetary Policy of Uncertain Exchange Rate Pass-Through

The paper uses MULTIMOD to examine the implications of uncertain exchange rate pass-through for the conduct of monetary policy. From the policymaker's perspective, uncertainty about exchange rate pass-through implies uncertainty about policy multipliers and the impact of state variables on stabilization objectives. When faced with uncertainty about the strength of exchange rate pass-through, policymakers will make less costly errors by overestimating the strength of pass-through rather than underestimating it. The analysis suggests that pass-through uncertainty of the magnitude considered does not result in efficient policy response coefficients that are smaller than those under certainty.

Batch process and transfer decisions in foreign market: a real options model

AbstractThis investigation extends the constant elasticity of substitution (CES) batch process production model of Lin et al. (J. Management syst. 2002; 9: 173) for an uncertain exchange rate by considering an export‐oriented manufacturer who can decide to switch freely between domestic and foreign locations. The export‐oriented manufacturer is risk averse and has rational expectations. As the entry cost declines, the export‐oriented manufacturer's entry trigger for the CES production function increases for transferring from a domestic and to a foreign location. Additionally, the manufacturer's exit trigger for CES production function increases for transferring from a foreign and to a domestic location. Moreover, the exit cost resembles the entry cost. Copyright © 2002 John Wiley & Sons, Ltd.

The Global CAPM and a Firm's Cost of Capital in Different Currencies

In an integrated global market, a firm's cost of capital expressed in one currency should be consistent with its cost of capital expressed in another currency. This article presents and illustrates a process for estimating consistent costs of capital in different currencies for a U.K. based multinational. In so doing, it uses a simple, easy‐to‐use version of the global CAPM that attempts to incorporate the effect of uncertain exchange rates by calculating exchange rate “betas.” As argued in the previous article, at least part of a company's currency exposure is systematically related to the global market and thus should be treated as a component of the firm's systematic equity risk.For example, the U.K. firm featured in this article is shown to have an exchange rate beta of 0.20 from the perspective of a U.S. investor. This implies that a 10% return on the global market in U.S. dollars tends to be associated with a 2% change in the U.S. dollar value of the British pound. One interesting consequence of incorporating exchange risk in this fashion is that two firms with identical U.S. global betas and costs of equity will have different expected returns expressed in another currency if they have different exposures to that currency.

VALUE‐AT‐RISK AND CORPORATE VALUATION

Although first used mainly by financial institutions to evaluate their trading risks, Value‐at‐Risk (VAR) can also be used to enhance an industrial corporation's understanding and management of its market risks. To illustrate this broader application of VAR analysis, the authors present a simple example focusing on the valuation of a closely held company. In this case, VAR is used to analyze the sensitivity of the firm's value to movements in uncertain exchange rates, commodity prices, and interest rates.

Financial Planning for the Multinational corporation with Multiple Goals

This paper presents a methodology for analyzing the financing problems raised by uncertain exchange rates and the various barriers to free capital flows. The stochastic goal programming model developed allows a way to improve the efficiency with which alternative combinations of corporate strategies, various environmental assumptions and financing mechanisms can be evaluated.