AN INTEGRATED MODEL OF MULTINATIONAL FLEXIBILITY AND FINANCIAL HEDGING

We construct a model of a multinational firm with flexibility in sourc ing its production and with the ability to use financial markets to he dge exchange rate risk. Agency costs generated by the firm's capital s tructure create a link between the firm's financial policy and its pro duction decisions. The firm's need for hedging is directly related to the degree of flexibility, and the production plan it chooses is a fun ction of the hedging strategy it employs. Consequently, the firm's abi lity to exploit its competitive position depends upon the degree to wh ich its flexibility is matched by the construction of an appropriate h edging strategy.