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Article
Publication date: 2 November 2015

Muhammad Umar and Gang Sun

– The purpose of this study is to analyze the relationship between country risk, stock prices and the exchange rate of the renminbi (RMB) compared to that of the US dollar.

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Abstract

Purpose

The purpose of this study is to analyze the relationship between country risk, stock prices and the exchange rate of the renminbi (RMB) compared to that of the US dollar.

Design/methodology/approach

An extended open macroeconomic model with investment–saving, liquidity preference–money supply and aggregate supply functions was used by applying comparative static analysis. After checking the series for stationarity and cointegration, a vector autoregressive model was applied. Lag length was selected based on the Akaike information criterion, and the coefficients were calculated for the overall sample and for pre- and post-July 2005 periods.

Findings

The stock market index is a significant determinant of variation in the exchange rate: when the Chinese stock market performs well, the RMB appreciates and vice versa. Country risk is not a significant determinant of the exchange rate, but the exchange rate of the RMB is a highly significant determinant of the country risk of China: depreciation of the RMB results in higher country risk and vice versa.

Research limitations/implications

Linear interpolation was used to calculate the monthly values of some of the variables for which only annual data were available.

Practical implications

The authorities should revalue the exchange rate of the RMB against the US dollar, which will result in lower country risk for China. One way to achieve this is to strengthen the performance of stock markets.

Originality/value

To the best of the authors’ knowledge, this is the first study to explore the relationship between the country risk of China and the exchange rate of the RMB. Using an open macroeconomic model, this novel research analyzes the relationships between country risk, stock prices and the exchange rate of the RMB from a different perspective.

Details

Journal of Financial Economic Policy, vol. 7 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 1 February 1985

Ike Mathur

A multinational firm in its normal, day to day conduct of business becomes vulnerable to potential gains and losses due to changes in the values of its assets and liabilities that…

Abstract

A multinational firm in its normal, day to day conduct of business becomes vulnerable to potential gains and losses due to changes in the values of its assets and liabilities that are denominated in foreign currencies. Exporting, importing, and investing abroad expose the firm to foreign exchange risks. Under the 1944 Bretton Woods Agreement, Central Bank interventions in foreign currency markets were frequent, with relatively minor changes in exchange rates. Managers then could afford to ignore foreign exchange exposure. However, with the demise of the Agreement in 1973, exchange rates for major currencies have fluctuated freely, sometimes wildly. These currency fluctuations constantly change the values of foreign currency assets and liabilities, thereby creating foreign exchange risks. Managing these foreign exchange risks now constitutes one of the most difficult and persistent problems for financial managers of multinational firms.

Details

Managerial Finance, vol. 11 no. 2
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 1 November 2001

Alpa Dhanani

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…

1206

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

Journal of Applied Accounting Research, vol. 6 no. 2
Type: Research Article
ISSN: 0967-5426

Keywords

Book part
Publication date: 23 December 2005

Jing Chi and Martin Young

While China is currently moving toward the full development of its own financial derivatives markets, to date, China's experience with these has been a negative one. This paper…

Abstract

While China is currently moving toward the full development of its own financial derivatives markets, to date, China's experience with these has been a negative one. This paper examines the importance to China of developing a fully integrated financial derivatives market from both the economic and financial market perspectives. It examines the best way forward for derivative trading, both market based and over-the-counter, and the types of products best suited to both, given the current state of the Chinese financial markets. Consideration is given to market structure, regulation, trading and settlement systems and international cooperation.

Details

Asia Pacific Financial Markets in Comparative Perspective: Issues and Implications for the 21st Century
Type: Book
ISBN: 978-0-76231-258-0

Book part
Publication date: 2 September 2020

Serdar Ogel, Adem Boyukaslan and Semih Acikgozoglu

The present study aims to reveal knowledge, report on perception level and look at the evaluation of exchange rate risk management techniques of enterprises registered to…

Abstract

The present study aims to reveal knowledge, report on perception level and look at the evaluation of exchange rate risk management techniques of enterprises registered to Afyonkarahisar Chamber of Commerce and Industry. In order to achieve this, the authors conducted a study that included a field-survey and consisted of 223 enterprises that have foreign trade transactions in Afyonkarahisar city. The data that were used in the analysis had been collected via a survey and they were statistically evaluated by SPSS program.

Within the scope of the study, the authors investigated the determination of corporational identity of the sampled manufacturing enterprises, organisational structure of finance departments, determination of ownership structures of these enterprises, determination of foreign exchange risk perceptions, classification of exchange rate risks according to industry type and the determination of risk management instruments such as internal and external hedging strategies and information and usage levels of derivative instruments.

The most important result obtained in the study is that the majority of the companies, which operate in a competitive environment, are intensely exposed to foreign exchange risk but try to overcome the foreign exchange risk using traditional internal firm-level hedging methods instead of well-reputed external hedging methods or derivative instruments. Firms declared to be out of knowledge – by any means – for derivative instruments as the main reason for not utilising a well-reputed external foreign exchange risk management techniques.

Details

Contemporary Issues in Business Economics and Finance
Type: Book
ISBN: 978-1-83909-604-4

Keywords

Article
Publication date: 15 November 2022

Muhammad Tahir, Haslindar Ibrahim, Badal Khan and Riaz Ahmed

This study aims to investigate the impact of exchange rate volatility and the risk of expropriation on the decision to repatriate foreign earnings.

Abstract

Purpose

This study aims to investigate the impact of exchange rate volatility and the risk of expropriation on the decision to repatriate foreign earnings.

Design/methodology/approach

The current study uses secondary data for foreign subsidiaries of US multinational corporations (MNCs) in 40 countries from 2004 to 2016. We use the dynamic panel difference generalised method of moments (GMM) to estimate the dynamic earnings repatriation model.

Findings

The findings show that foreign subsidiaries of US MNCs in countries with volatile exchange rates tend to repatriate more earnings to the parent company. The findings also reveal that a greater risk of expropriation in the host country leads to the higher repatriation of foreign earnings to the parent company. The findings support the notion that MNCs use the earnings repatriation policy as a means of mitigating risks arising in the host country.

Practical implications

Practical implications for modern managers include shedding light on how financial managers can use earnings repatriation policy to mitigate exchange rate risk and the risk of expropriation in the host country. The findings also contain policy implications at the host country level that how exchange rate volatility and risk of expropriation can reduce foreign investment in the host country.

Originality/value

This study adds to the earnings repatriation literature by analysing the direct effect of exchange rate volatility on earnings repatriation decisions, as opposed to the impact of the exchange rate itself, as suggested by previous research. Hence, the findings broaden our understanding of the direct influence of exchange rate volatility on the decision to repatriate foreign earnings. The present study also examines the role of the risk of expropriation in determining earnings repatriation policy, which has received little attention in prior empirical studies.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 29 June 2012

Tom Aabo, Marianna Andryeyeva Hansen and Christos Pantzalis

The purpose of this paper is to investigate how non‐finance departmental involvement in the management of exchange rate risks impacts the extent of foreign exchange speculation in…

3006

Abstract

Purpose

The purpose of this paper is to investigate how non‐finance departmental involvement in the management of exchange rate risks impacts the extent of foreign exchange speculation in non‐financial firms.

Design/methodology/approach

Non‐financial firms in a small open economy (Denmark) are surveyed to investigate the extent of foreign exchange speculation and how it is related to the degree of nonfinance departmental involvement in the management of exchange rate risks. The authors employ binary and ordered probit regression analysis.

Findings

A positive link is found between the extent to which departments other than the finance department are involved in the management of exchange rate risks; and second, the extent to which the firm is likely to speculate – whether in the form of selective hedging or active speculation – on the foreign exchange market.

Practical implications

The findings indicate that the trend towards a more integrated risk management approach in which the finance department is not the only department responsible for risk management may have the (unforeseen) consequence that foreign exchange speculation increases.

Originality/value

The paper's findings are important because the link between the extent of foreign exchange speculation and a more integrated risk management approach has not been addressed previously.

Article
Publication date: 7 August 2007

Willem F.C. Verschoor and Aline Muller

This paper aims to increase understanding of the (time‐varying) relationship between exchange rates and stock prices at the individual firm level. Rather than analyzing the impact…

3502

Abstract

Purpose

This paper aims to increase understanding of the (time‐varying) relationship between exchange rates and stock prices at the individual firm level. Rather than analyzing the impact of exchange rate movements on firm value by regressing multinationals’ stock returns on exchange rate changes, it is proposed to examine the impact of increased exchange rate variability on the stock return volatility of US multinationals by focusing on the 1997 Asian financial turmoil.

Design/methodology/approach

In a first step, it is investigated whether the enhanced uncertainty about the future performance of US multinationals active in Asia resulted in an increased stock return variability. The second step separates the impact of increased exchange rate variability on the stock return volatility of US multinationals into systematic and diversifiable risk.

Findings

It is found that the stock return variability of US multinationals increases significantly in the aftermath of the financial turmoil. In conjunction with this increase in total volatility, there is also an increase in market risk (beta) for US multinationals. Moreover, trade‐ and service‐oriented industries appear to be particularly sensitive to these changing exchange rate conditions.

Practical implications

If the additional risk imparted to exposed firms from increased exchange rate variability is systematic in nature, it will affect the required rate of (equity) return (i.e. investors demand higher returns for holding the firm's shares). Consequently, this effect of exchange rate fluctuations increases the cost of (equity) capital for US multinationals with real foreign operations in the crisis countries.

Originality/value

This paper demonstrates the impact of increased exchange risk on stock return volatility and market risk.

Details

Managerial Finance, vol. 33 no. 9
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 2 October 2020

Xiu Wei Yeap, Hooi Hooi Lean, Marius Galabe Sampid and Haslifah Mohamad Hasim

This paper investigates the dependence structure and market risk of the currency exchange rate portfolio from the Malaysian ringgit perspective.

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Abstract

Purpose

This paper investigates the dependence structure and market risk of the currency exchange rate portfolio from the Malaysian ringgit perspective.

Design/methodology/approach

The marginal return of the five major exchange rates series, i.e. United States dollar (USD), Japanese yen (JPY), Singapore dollar (SGD), Thai baht (THB) and Chinese Yuan Renminbi (CNY) are modelled by the Bayesian generalized autoregressive conditional heteroskedasticity (GARCH) (1,1) model with Student's t innovations. In addition, five different copulas, such as Gumbel, Clayton, Frank, Gaussian and Student's t, are applied for modelling the joint distribution for examining the dependence structure of the five currencies. Moreover, the portfolio risk is measured by Value at Risk (VaR) that considers the extreme events through the extreme value theory (EVT).

Findings

The finding shows that Gumbel and Student's t are the best-fitted Archimedean and elliptical copulas, for the five currencies. The dependence structure is asymmetric and heavy tailed.

Research limitations/implications

The findings of this paper have important implications for diversification decision and hedging problems for investors who involving in foreign currencies. The authors found that the portfolio is diversified with the consideration of extreme events. Therefore, investors who are holding an individual currency with VaR higher than the portfolio may consider adding other currencies used in this paper for hedging.

Originality/value

This is the first paper estimating VaR of a currency exchange rate portfolio using a combination of Bayesian GARCH model, EVT and copula theory. Moreover, the VaR of the currency exchange rate portfolio can be used as a benchmark of the currency exchange market risk.

Details

International Journal of Emerging Markets, vol. 16 no. 5
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 1 September 2005

Joshua Abor

This paper reports on the foreign exchange risk‐management practices among Ghanaian firms involved in international trade. The study focuses on how Ghanaian firms manage their…

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Abstract

Purpose

This paper reports on the foreign exchange risk‐management practices among Ghanaian firms involved in international trade. The study focuses on how Ghanaian firms manage their foreign exchange risk and the problems involved in managing exchange rate exposure. It also seeks to ascertain the extent to which these firms use foreign exchange risk management techniques.

Design/methodology/approach

Descriptive statistics were used in the presentation and analysis of empirical results.

Findings

The results indicate that close to one‐half of the firms do not have any well‐functioning risk‐management system. Foreign exchange risk is mainly managed by adjusting prices to reflect changes in import prices resulting from currency fluctuation, and also by buying and saving foreign currency in advance. The main problems the firms face are the frequent appreciation of foreign currencies against the local currency and the difficulty in retaining local customers because of the high prices of imported inputs, which tend to affect the prices of their final products sold locally. The results also show that Ghanaian firms involved in international trade exhibit a low level use of hedging techniques.

Originality/value

The main value of this paper is the analysis of foreign exchange exposure management from the Ghanaian perspective. Relevant recommendations aimed at enhancing the foreign exchange risk‐management practices among Ghanaian firms are made. The paper is useful not only to firms involved in international trade, but also to financial institutions interested in providing hedging products to these firms.

Details

The Journal of Risk Finance, vol. 6 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

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