Removing foreign direct investment's exchange rate risk in developing economies: the case for a foreign exchange custodian board

This paper proposes a system design (foreign exchange custodian board) that may stimulate foreign direct investment (FDI) in developing economies through the removal of foreign investors' exchange rate risk in investment outlay. For any expected distribution of exchange rate on any interval aro...

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Bibliographic Details
Published in:International review of economics & finance 2006, Vol.15 (3), p.294-315
Main Authors: Yip, Paul S.L., Yao, S.T.
Format: Article
Language:English
Subjects:
Custodians
Developing countries
Developing economies
Economic development
Exchange rate risk
Foreign direct investment
Foreign exchange custodian board
Foreign exchange rate risk
Foreign exchange rates
Foreign investment
LDCs
Studies
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Summary:This paper proposes a system design (foreign exchange custodian board) that may stimulate foreign direct investment (FDI) in developing economies through the removal of foreign investors' exchange rate risk in investment outlay. For any expected distribution of exchange rate on any interval around the starting exchange rate, there exists a non-negative custodian service charge that both the developing economy and foreign investors can benefit from the proposed system. When the increase in domestic factors' value added caused by FDI is sufficiently large, the developing economy will benefit even in the absence of any custodian service charge.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2004.09.006