ABSTRACT – We propose a structural method to evaluate investment projects with risky cash flows which explicitly models how risk factors affect firms’ costs and revenues. We combine a demand system with counterfactual paths of risk factors that are generated using copulas to ultimately compare risk-return profiles of firms at different horizons. We illustrate the method by studying how the US operations of German carmakers BMW and Porsche are affected by the decision to relocate production, i.e. operational hedging. We find that for plausible costs of building a plant, production in the US is attractive for BMW, but not for Porsche.
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