EXCHANGE RATE RISK AND ITS IMPACT ON THE FOREIGN DIRECT INVESTMENT OF U.S. MULTINATIONALS (UNITED STATES)

GREGORY CLARE, Fordham University

Abstract

In 1973 countries began allowing their currencies to float. Since then concern has emerged over the impact which flexible rates have on international trade and investment. The general assumption is that firms are risk averse and flexible rates will discourage international trade and investment.^ Generally it is suggested that firms undertaking foreign investment borrow in the foreign market to cover their exposure to the risk. Stevens recommends the firms borrow an amount equal to profits earned and assets denominated in terms of the foreign currency. Yet when tested he finds firms are not following his recommendation.^ The recommendation to borrow is predicated on the assumption of risk aversity. Yet, there has never been an acceptable test of the risk aversity hypothesis which yielded unambiguous results. Therefore, a model is derived which includes exchange rate risk explicitly. Not only does the model offer an alternative to borrowing but it permits testing the risk aversity hypothesis.^ The model is tested on the foreign direct investment flows in manufacturing from the U.S. to both developed and less developed countries. The period covered is from 1974 to 1977. Test results strongly support the risk aversity hypothesis. In addition new insight is gained into the way firms can cover or reduce their exposure to risk and additional implications of government policies emerge. ^

Subject Area

Finance

Recommended Citation

CLARE, GREGORY, "EXCHANGE RATE RISK AND ITS IMPACT ON THE FOREIGN DIRECT INVESTMENT OF U.S. MULTINATIONALS (UNITED STATES)" (1986). ETD Collection for Fordham University. AAI8615725.
http://fordham.bepress.com/dissertations/AAI8615725

Share

COinS