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The Adler‐Dumas regression approach to foreign currency exposure measurement and hedging is examined in the presence of an uncertain domestic inflation rate. The assumption made here is that the investor is primarily concerned with the real, and not the nominal, value of the domestic currency value of his foreign currency cash flow. A revised measure of exposure, real exposure, is developed and shown to exhibit a numerical value less than that of the Adler‐Dumas measure. A revised optimal hedging amount which minimizes the variance of the investor's real terminal cash flow is calculated. It is shown to exhibit a numerical value less than that of the Adler‐Dumas optimal hedging amount. Thus a financial manager who ignores the positive correlation between the domestic inflation rate and the exchange rate would tend to overstate his company's exposure and engage in excessive foreign currency hedging. The correct exposure measure and the appropriate amount of foreign currency hedging can be obtained by employing inflation‐adjusted, rather than nominal, cash flows.

The purpose of this paper is to examine the nexus between interest rate changes and commodity spot prices.

The cost‐of‐carry model of simultaneous equilibrium in commodity spot and futures prices is employed to gauge the effects induced by interest rate changes. Results depend crucially on the type of expectations that prevail for the commodity market in question.

Under mean‐reverting expectations, an increase (decrease) in the interest rate will cause the spot price to drop (increase) and commodity suppliers to dishoard (hoard) inventories. Under invariant expectations, the change in the interest rate induces no change in the spot price and no hoarding/dishoarding behavior among commodity suppliers. Under momentum expectations, an increase (decrease) in the interest rate will cause the spot price to increase (drop) and suppliers to hoard (dishoard) inventories.

The effects of monetary policy actions on commodity spot prices can be gauged employing the simple model developed here.

A novel application of the cost‐of‐carry model is presented.

This paper aims to examine the economic rationale for the shotgun clause, a legally specified protocol for the dissolution of a partnership or a private corporation that empowers one investor to acquire ownership of all the venture's assets.

Employing simple mathematics, the behavior of the initiating party or offeror is modeled in a situation of informational asymmetry and then optimized. The implications of offeror optimal behavior are then examined.

The paper finds that the introduction of a shotgun clause lowers the offeror's optimal offer price. Whereas in the absence of the clause, the offer price must exceed the offeror's private valuation of the business, in the presence of said clause the offeror's price may not exceed the offeror's private valuation. Situations where the shotgun clause improves versus impairs economic efficiency are delineated. For high (low) offeror private valuations of the business, the shotgun clause induces a greater (lower) discrepancy between said valuation and the offer price. Offerors with high private valuations of the business are shown to prefer the inclusion of the shotgun clause.

The behavioral ramifications of the shotgun clause are presented, thus providing potential partners and private corporation shareholders a guide for the clause's inclusion or exclusion when the small business is structured.

This is the first paper to provide an analysis of the shotgun clause in the context of informational asymmetry, employing refinements and simplifications of extant models that address other small business dissolution procedures.

The purpose of this paper is to contextualize a productivity contest between a local manufacturer versus a foreign one, both of whom sell an identical product in the local market, within the two companies' respective economies. The intent is to delineate the conditions under which one firm gains a competitive advantage over the other.

The purchasing power parity model is reformulated to account for differential rates of macroeconomic productivity gain in the two countries. The implications of these differential rates vis‐à‐vis the productivity contest between the local and foreign manufacturer are then explored.

To gain a competitive advantage over its foreign rival, the local firm must achieve a net productivity improvement relative to its (local) economy that surpasses the net productivity improvement of the foreign rival relative to its (foreign) economy. Thus, the local firm stands in a rivalrous relationship not solely with its foreign competitor but also with the average firm in its very own (local) economy and in a complementary relationship with the average firm in the foreign economy. The foregoing is shown to be a generalization of the Dutch disease phenomenon and to imply that national efforts to attain competitive advantage are self‐contradictory.

In its productivity contest with its foreign rival, the local firm's management should not focus myopically on a comparison of the two firms' rates of net productivity improvement. Rather, the focus should be on the two firms' differential rates of net productivity improvement relative to their respective economies.

The main conclusions of this paper, which derive from the effect of productivity changes on exchange rates, are both stark and original. A firm is engaged in a productivity contest with the average firm in its own economy. Thus, national efforts to enhance productivity are counter productive to a firm whose productivity improvement lags behind that of the average domestic firm.

This paper seeks to argue that any competitive advantage realized by a firm that produces domestically and exports to a foreign market due to a real depreciation (appreciation) of the domestic (foreign) currency is purely transitory and thus not sustainable. Diversification of manufacturing operations across a number of countries and appropriate production rescheduling in light of real exchange rate changes are required to transform the character of this competitive advantage from merely transitory to sustainable.

Analytic proof is provided of the dependence of an exporting firm's real profit margin on the real exchange rate. A simple contemporaneous and one‐period lagged model of the current account balance is then posited to argue that real exchange rates exhibit mean‐reversionary behavior.

The Marshall‐Lerner condition, which is a mainstay of balance‐of‐payments models is shown to imply that real exchange rates exhibit mean‐reversionary behavior. Extensive empirical evidence is cited that accords with this theoretical conclusion. Thus, any gain in competitive advantage due to a change in real exchange rates that accrues to a firm with a single manufacturing operation is merely transitory and not sustainable.

To position itself to achieve sustainable competitive advantage from changes in real exchange rates, a firm must maintain a global supply chain diversified across many countries. With the flexibility provided by such disparate plant locations, production schedules can be adjusted in response to real exchange rate changes, to wit, increased (reduced) manufacturing should be programmed in countries whose currencies have experienced real depreciations (appreciations). Owing to oscillating real exchange rates, these requisite production schedule adjustments are expected to be perpetual.

The algebraic formulation of the firm's inflation‐adjusted profit margin's dependency on the real exchange rate and the analytical proof that the Marshall‐Lerner condition implies mean‐reversionary behavior in real exchange rates are both novel. The implications with regard to competitive advantage are likewise original.

The purpose of this paper is to examine the impact of heterogeneous expectations on the equilibrium value of a risky asset in a capital market populated by investors that choose mean‐variance efficient portfolios.

A single‐period, discrete‐time version of Williams' capital asset pricing model that incorporates heterogeneous beliefs regarding the mean vector of rates of return and homogeneous beliefs regarding the variance‐covariance matrix of rates of return is developed. It is then employed to gauge the impact of both divergence of opinion and increases thereof on the equilibrium price of a risky asset.

The value of a risky asset under heterogeneous beliefs differs from that under homogeneous beliefs as the former is biased towards the beliefs of wealthier and/or more risk tolerant investors. If the latter set of investors is optimistic (pessimistic), the value is higher (lower) than that which prevails in the absence of divergence of beliefs. Increasing divergence of opinion likewise affects the equilibrium price of a risky asset to accord more with the beliefs of wealthier and/or more risk tolerant investors. If the latter set of investors is optimistic (pessimistic), increasing dispersion of beliefs causes the value of a risky asset to rise (fall).

A novel simplification and application of Williams' model of capital asset pricing is presented. The findings differ from conclusions derived in previous theoretical treatments of divergence of opinions in capital markets.

Operating exposure to foreign exchange risk and exchange rate pass-through are investigated in the context of a Cournot model of equilibrium in a homogeneous product market, i.e. an industry populated by N firms, which compete exclusively on the basis of quantities produced/marketed and where each firm optimizes its decision based on expectations regarding the actions of its rivals that in fact eventuate. Whereas one firm sources its product domestically, the remaining N−1 firms source their product in a foreign country. The paper aims to discuss these issues.

By invoking two simplifying assumptions, namely, constant marginal cost functions and a linear inverted demand curve, and then deriving the Cournot equilibrium, this paper obtains clear implications regarding the effect of a currency devaluation on the competitive positions of the industry’s N constituent firms as well as the pass-through effect on the industry price.

The N−1 firms that source the homogeneous product from a foreign country, which experiences a devaluation, gain, while the single competing firm that sources domestically loses, both market share and profit. Formulas are derived which elucidate this intuitive result. The extent of exchange rate pass-through on the resulting equilibrium price is gauged to be incomplete, consistent with extant empirical evidence. As the number of firms increases, the extent of exchange rate pass-through likewise increases, approaching a limiting situation of complete pass-through.

This paper is the first to examine the issues of exchange rate operating exposure and pass-through in the context of a Cournot model of competition, under the indicated two simplifying assumptions.

This paper aims to examine the nexus between hedging, which reduces the volatility of corporate assets, and the anomaly of debt overhang, whereby corporate management is motivated to reject positive net present value (NPV) projects. The question of whether hedging ameliorates or aggravates debt overhang is addressed.

The Black–Scholes isomorphism between common shares and call options is exploited to determine the allocation of a project’s NPV between debt- and stock-holders. The effect of hedging on this NPV-partitioning is then gauged to determine the resulting likelihood of debt overhang.

If the volatility of corporate assets is below a critical maximum, hedging ameliorates debt overhang consistent with extant theoretical research. However, above that critical value of volatility, hedging aggravates debt overhang.

The novel result of this note, namely, hedging may exacerbate debt overhang, is demonstrated both analytically and intuitively. The latter is explained by allusion to a second agency-theoretic conflict between debt- versus stock-holders, namely, risk shifting. The disparate effects of hedging on debt overhang imply a non-monotonic relationship between metrics for these two variables, which is a phenomenon that extant empirical studies have failed to take into account.

The purpose of this paper is to develop a model of international capital market equilibrium where investors exhibit home‐country bias due to their desire to hedge real consumption.

This paper posits a two‐stage process of portfolio choice for the representative investor of a country. In the first step, the investor's benchmark portfolio is determined, whereas in the second step, his optimal portfolio is chosen. The latter portfolio maximizes the expected portfolio rate of return minus the risk tolerance weighted variance of tracking error. The market equilibrium implications of the portfolio optimality conditions are determine via aggregation across all investors and countries.

A revised security market line is derived that differs from the traditional security market line in terms of vertical intercept, slope, and beta coefficient. It is demonstrated that the derived model may be interpreted as a multi‐country generalization of the Chen‐Boness extension of the capital asset pricing model under uncertain inflation.

This paper presents an innovative application of Roll's tracking portfolio paradigm. Another novel feature is the derivation of the international capital market equilibrium implications of such portfolio choice behaviour.

This chapter focuses on the main challenges of teaching and learning European Union (EU) issues, bearing in mind that the future of the EU is far from being granted, the shock of Brexit, and the new technological innovations. The purpose is to design a methodology for teaching EU using knowledge management and design thinking procedures. Knowledge management refers to information selection, acquisition, integration, analysis and sharing knowledge that takes place in an environment dominated by social networks in which technological links play a major role. The design thinking procedures, as a collaborative methodology, create groups of students in the classroom. Each group should represent an EU member state. Once groups are created, the teacher must give them a task that may include a problem that the EU has had to solve during its history. Then, individual groups must be asked to design a solution. A consensus among all participating groups on the proposed solution should be reached. To design a solution, based on a mind map, groups should be working inside and outside the classroom using technological tools and interacting through social media. At the end of this process, students must play a Kahoot to fix and clarify the key concepts of each lesson. This process must be repeated for all the chapters of the EU syllabus. The syllabus is made up of key issues of the EU. Students should be taken to discover how EU affects their lives and to wonder how they would be without the EU.