Search results
1 – 10 of over 23000To understand how foreign exchange risk is managed it may be important to document who is involved in its management. Different individuals working in corporations will have…
Abstract
To understand how foreign exchange risk is managed it may be important to document who is involved in its management. Different individuals working in corporations will have different perspectives and different backgrounds including functional specialisms which fit them for functional roles. They will have specific job responsibilities inherent in their job descriptions. It is hypothesised that the nature of who gets involved in managing foreign exchange risk will impact on how it is managed. This paper reports on the findings of a postal survey of foreign exchange risk management practices in British Times 1000 corporations carried out in late 1991. The findings give support to the hypothesis and raise the issue of whether optimal foreign exchange risk management can occur when how it is managed is significantly influenced by who manages it. This is particularly so, given that the nature of the exposure reported by different corporations is not normally found to be significantly associated with who manages it. The paper concludes with a brief discussion of the implications of the findings.
P.A. Collier, E.W. Davis, J.B. Coates and S.G. Longden
The objective of this paper is to extend research findings obtained in a preliminary survey of currency risk management in UK multinational companies (Collier and Davis, 1985) by…
Abstract
The objective of this paper is to extend research findings obtained in a preliminary survey of currency risk management in UK multinational companies (Collier and Davis, 1985) by presenting a case study analysis of currency risk management practice in large UK and US multinational companies. The research is specifically concerned with aspects of the management of foreign currency transaction and translation risk by multinational companies and the extent of risk aversion in the policies adopted.
According to academics, the translation form of exchange rate risk does not affect the market value of a firm and as a result should not be managed by corporate managers. Research…
Abstract
According to academics, the translation form of exchange rate risk does not affect the market value of a firm and as a result should not be managed by corporate managers. Research to date, however, suggests that many multinational companies (MNCs) actively monitor and manage their translation exchange risk. Thus, either corporate management fail to understand the irrelevant nature of this risk or there are other factors that need to be considered. This paper extends the current literature by examining these issues; in particular, it examines whether MNCs continue to manage their translation exchange rate risk and if so what their reasons are for the specific practices. Results suggest that the gearing ratio, itself a measure of risk, is largely responsible for the management of the translation process. Further, some companies seek to manage their ‘profit and loss translation exchange risk,’ a ‘risk’ resulting from the impact of the translation process on the profit and loss account. Preferred management strategies include the currency denomination of debt and use of financial instruments such as forward contracts. Capital market imperfections reflected in binding loan covenants, agency theory problems and the assumption of inefficient market behaviour explain the observed corporate management behaviour.
Details
Keywords
Changes in the financial and competitive environment have been a recurring stimulus to corporate reappraisal of foreign exchange risk management (FERM) policy. In 14 UK company…
Abstract
Changes in the financial and competitive environment have been a recurring stimulus to corporate reappraisal of foreign exchange risk management (FERM) policy. In 14 UK company cases studied by the author, treasurers identified the following competitive and financial environmental influences on FERM policy.
Two principal forms of cash flow exposure to real exchange rate changes have been identified in the literature, namely transaction exposure and economic exposure. A number of…
Abstract
Two principal forms of cash flow exposure to real exchange rate changes have been identified in the literature, namely transaction exposure and economic exposure. A number of surveys carried out over the last two decades have reported that managers attach more importance to managing transaction exposure than to managing economic exposure. The theoretical literature, on the rare occasions when the issue has been addressed, indicates that while both forms of exposure are linked, economic exposure should be a more significant exposure than transaction exposure for corporations. This paper examines the available evidence from empirical surveys of foreign exchange risk and its management in order to confirm or reject theoretical predictions and the truth of this paradox, and in case of the confirmation of the paradox to suggest a rationale for its existence. In the event the evidence reviewed in this paper confirms the paradox and suggests alternative explanations for its existence.
Supply chain risks significantly endanger small and medium‐sized enterprise (SME‐) suppliers in different currency areas in purchasing and sales. The purpose of this paper is…
Abstract
Purpose
Supply chain risks significantly endanger small and medium‐sized enterprise (SME‐) suppliers in different currency areas in purchasing and sales. The purpose of this paper is twofold: to describe the concept of natural hedging in supply chains, and to highlight the potentials of natural hedging as a risk prophylaxis and a supplier financing approach.
Design/methodology/approach
The paper uses a brief literature review and a conceptual research design, taking the financial and physical component of natural hedging (in this case between an OEM and its SME‐suppliers in the automotive industry) into consideration.
Findings
Natural hedging of currency and commodity price fluctuations can contribute to the reduction of SME‐suppliers' supply chain vulnerability, also benefiting an OEM.
Research limitations/implications
This research focuses exclusively on relationships between SME‐suppliers and large OEMs in the automotive industry. Studies of other types of companies and industries, such as the capital goods industry, might reveal divergent practices.
Practical implications
With the natural hedging approach, the paper promotes an innovative concept for better managing risks in supply chains, especially in recessionary times. The concept is a source for supplier financing.
Originality/value
This research shows that a globally active focal firm – an OEM in the automotive industry, for instance – can hedge currency and commodity price risks (financial components), as well as operational supply risks (physical components), by centralizing commodity supply with its SME‐suppliers. It can serve as a basis for future research.
Details
Keywords
Guonan Ma and Robert N McCauley
The renminbi (RMB) has evolved in four phases since its mid-2005 unpegging from the US dollar. After a year's transition, the RMB's effective exchange rate traded for two years…
Abstract
The renminbi (RMB) has evolved in four phases since its mid-2005 unpegging from the US dollar. After a year's transition, the RMB's effective exchange rate traded for two years within narrow bands around an appreciating trend. That is, the RMB behaved as if it were managed to strengthen gradually against trading partners’ currencies. This experiment was interrupted in mid-2008 and the RMB stabilized against a strong dollar amidst the global financial crisis. If Chinese policy were to return to effective currency stability and other East Asian countries were to pursue similar policies, regional currency stability would be enhanced. That would create more favorable conditions for an evolution towards monetary cooperation.
Details
Keywords
Katrina Bradley and Peter Moles
The effect of exchange rate movements on firm value is important to firms engaged in international transactions. These accounting exposures can be managed using financial…
Abstract
The effect of exchange rate movements on firm value is important to firms engaged in international transactions. These accounting exposures can be managed using financial instruments. However, the competitive or strategic effects that create economic exposure require firms to adopt a strategic approach. This paper reports on the extent to which large, publicly‐listed UK firms adopt a strategic approach to the management of exchange rate risk. Unlike earlier studies, the results indicate the widespread use of a range of operational hedging techniques. A significant proportion of firms are also found to incorporate currency risk management as a factor in decisions made by their operating departments. However, the study also indicated considerable variation in the application of operational techniques between firms and industry sectors.
Details
Keywords
O. Duangploy, V.H. Bakay and P.A. Belk
This study examines how US multinational enterprises manage foreign exchange risks by exploring the concepts applied by management, the objectives followed, and how management has…
Abstract
This study examines how US multinational enterprises manage foreign exchange risks by exploring the concepts applied by management, the objectives followed, and how management has organised this important function of multinational financial management. Despite the change in generally accepted accounting principles from SFAS8 to SFAS52 and the fact that translation exposure is not real exposure, 19 of the 22 surveyed companies closely monitored accounting exposure and would take action under certain circumstances. Further, transaction exposure management still plays a significant role in foreign exchange risk management. Economic exposure management, which focuses on foreign exchange‐induced changes in future cash flows, was also perceived as essential, although the degree of sophistication varies. The majority of the participating companies are risk averse and have centralised their foreign exchange risk management.