Hedging entry and exit decisions: optimizing location under exchange rate uncertainty |
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Authors: | Wu, Cheng-Ru Lin, Chin-Tsai |
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Affiliation: | Graduate Institute of Business and Management, Yuanpei University of Science and Technology, 306 Yuanpei Street, Hsin Chu 300, Taiwan, R.O.C. |
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Abstract: | ** Email: alexru00{at}ms41.hinet.net*** Email: ctlin{at}mail.yust.edu.tw The CobbDouglas production function with Abel's (1983,Am. Econ. Rev., 173, 228233) model is extended herein,and real options analysis (ROA) for entryexit decision-makingestablished utilizing Dixit's (1989b) decision model under exchangerate uncertainty. This work considers the effects of real exchangerates on strategies that determine the locations of productionby firms that are entering markets in two countries. The ROAis also adopted to evaluate the switching location between twocountries. A continuous-time model optimization problem is solvedin closed-form. This provides a useful beginning to an importantanalysis of the effects on industry of exchange rate fluctuationswhen the optimal entry (exit) trigger for transferring locationsis important for a basic global logistics model. Furthermore,a myopic solution of the optimal entry (exit) trigger, sensitivityanalysis and some characteristics of the optimal productionstrategy are sought. This paper contributes to the problem ofchoice of foreign production strategy. |
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Keywords: | built-to-order entry and exit exchange rate uncertainty real options choice of foreign production strategy |
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