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Contracts, delivery lags, and currency risks
This paper presents a competitive model in which exchange rate uncertainty has real effects on how trade contracts are written and executed. In this model, exporting firms have an incentive to delay delivery on trade contracts whenever they can sell their products on the domestic market for a higher...
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Published in: | Journal of international money and finance 1989-03, Vol.8 (1), p.89-103 |
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Main Authors: | , |
Format: | Article |
Language: | English |
Subjects: | |
Citations: | Items that this one cites Items that cite this one |
Online Access: | Get full text |
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Summary: | This paper presents a competitive model in which exchange rate uncertainty has real effects on how trade contracts are written and executed. In this model, exporting firms have an incentive to delay delivery on trade contracts whenever they can sell their products on the domestic market for a higher price than the domestic currency value of the price specified by the trade contracts. In general, it is costly for a firm to offer a credible commitment to the promised delivery date of a trade contract. We demonstrate that under certain conditions a firm can costlessly commit to a policy of no delivery lags by the appropriate choice of the currency of denomination of trade contracts. |
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ISSN: | 0261-5606 1873-0639 |
DOI: | 10.1016/0261-5606(89)90016-8 |