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To study the determinants and effects of “Operational” exchange rate exposure resulting from the mismatch between cost and revenues of the firms by using data on 500 Indian firms.

We conduct detailed empirical analysis of the determinants of firm level exposure and their impact using panel regression techniques and conduct several robustness tests to confirm the validity of these results.

Among other factors, exchange rate volatility appears as a significant determinant of average firm level exposure with the direction of relationship supporting the presence of “Moral Hazard” in firm’s risk-taking behavior. Further large “operational” exposure is associated with significantly lower output growth, profitability, and capital expenditure during episodes of large currency depreciation at the firm level.

This paper leaves several questions to be answered. Further research is called for to explore the nature of distortions in the production process encouraged by exchange rate volatility and their impact on firm level productivity. Looking at the relationship between the use of financial and operational hedges is another fruitful area of future research.

Our results have important implications for policy makers worried about mitigating the impact of exogenous shocks. Implicit and explicit guarantees with regards to the value of exchange rate tend to raise the vulnerability of the economy to exchange rate shocks at same time that they encourage capital expenditures and possibly output growth during “normal” times. Our findings indicate that the policy makers must take into account the incentive effects of their intervention in foreign exchange markets.

Unlike the existing papers in the literature, we use a measure of “operational” currency exposure based on foreign currency revenues and costs of firms. In most of the existing papers the focus is on the mismatch between the currency denomination of assets and liabilities. Little attention has been paid to the currency mismatch between costs and revenues of the firms. Such “operational” mismatches are potentially equally important and deserve attention of policy makers and academics alike.

The purpose of this paper is to analyse the Spanish business sector’s economic exposure to currency risk in Latin America between 2010 and 2016, testing the effectiveness of hedging with derivatives for the reduction of this risk.

Economic exposure is tested with the Jorion model (1990) using both a currency basket and an individualised analysis for the main currencies sustaining business activities between Spain and Latin America: the Mexican peso, Brazilian real, Argentine peso, Chilean peso, and Colombian peso. For the hedging analysis, dynamic panel data models were estimated using a generalised method of moments.

The results reveal that the number of firms with significant economic exposure is sensitive to the temporal frequency of the observations. The evidence denotes that the firms’ export profile is predominant, both when considering a basket of Latin American currencies and when individually considering the five main pairs of currencies. The only exception is the Argentine peso, where firms’ import profile is slightly higher. The Chilean peso stands out as the currency with the greatest number of firms with significant exposure.

This work provides unpublished evidence on economic exposure to currency risk in Latin America in a recent period characterised by two main aspects: an important devaluation of some Latin American currencies with respect to the euro; and an enhancement of Spanish business activities in the region to favour growth during the recent recession of the Spanish economy.

este trabajo analiza la exposición económica al riesgo cambiario en Latinoamérica por parte del sector empresarial español entre 2010 y 2016. Asimismo, evalúa la efectividad de la cobertura con productos derivados en su reducción.

la exposición económica es estimada a través del modelo de Jorion (1990), utilizando tanto una cesta de divisas como un análisis individualizado para las principales divisas que sustentan la actividad entre España y Latinoamérica, a saber, Peso mexicano, Real brasileño, Peso argentino, Peso chileno, y Peso colombiano. Respecto al análisis de la cobertura, se estiman modelos dinámicos con datos de panel a través del método generalizado de momentos.

los resultados muestran que el número de empresas con exposición económica significativa es sensible a la frecuencia temporal de las observaciones. Asimismo, la evidencia denota que el perfil exportador de las empresas es mayoritario, tanto al considerar una cesta de divisas latinoamericanas como, individualmente, los cinco principales pares de divisas. La única excepción es el peso argentino, donde el perfil importador de las empresas es levemente superior. Asimismo, el peso chileno destaca como la divisa con mayor número de empresas con exposición significativa.

este trabajo aporta evidencia inédita sobre la exposición económica al riesgo cambiario en Latinoamérica en un período reciente caracterizado por dos aspectos principales: i) una importante depreciación de algunas divisas latinoamericanas respecto al euro; ii) una potenciación de la actividad empresarial española en esa región para favorecer su crecimiento durante la reciente recesión de la economía española.

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.

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.

As is true for all areas of financial management, working capital management is more complex for the multinational corporation (MNC) than for firms engaged in only domestic operations. Such incremental complexity is due to a number of reasons related to the effects of operating in diverse economic and political climates and tax jurisdictions. This article is concerned with selected aspects of how foreign exchange risk—the potential impact on a MNC's profitability, net cash flows, and market value of a change in exchange rates—may affect working capital management.

This study provides evidence on the importance of operational hedges in foreign-exchange risk management, an issue that has been largely ignored in the literature. One possible reason for the absence of empirical evidence in the literature may be related to the difficulty in devising the appropriate measures of a firm's ability to construct operating hedges. We utilize measures of the structure of an MNC's foreign subsidiary network as proxies of the firm's ability to devise operational hedges and examine their relationship to exposure coefficients computed prior to and during the 1997–1998 Asian currency crisis. Our results show that the mean exposure during the Asian crisis period was significantly higher than the pre-crisis period. In addition, the mean of the absolute change in the exposure of MNCs that only operate in the Asian crisis region was significantly higher than that of MNCs without operations in the crisis region. We find a strong relationship between our proxies for ability to construct operating hedges and exchange-rate exposure measures both prior to the crisis and during the crisis. An even stronger association between exposure and measures of the MNC network structure is found for the sub-sample of MNCs that have some operations in the Asian crisis region. Similar results are obtained when the relationship is examined separately for “net importers” (MNCs with positive exposures) and “net exporters” (MNCs with negative exposures). Overall, our results are consistent with the notion that operational hedges significantly reduce a firm's exposure to foreign-exchange risk.

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.

The purpose of this paper is to examine the firm-specific and macroeconomic determinants of profitability of Indian manufacturing firms. It assesses the main determinants of firm’s profitability in the pre-crisis and post-crisis period from 2000 to 2015.

This methodology splits the factors that influence firm profitability in two groups: firm-specific (internal) factors and macroeconomic indicators. It further aims to look at the consistency of the factors in the pre-crisis and post-crisis period. The return on assets and the net profit margin are considered as proxy for corporate profits. The panel generalized least square and panel vector auto-regression model have been employed, and it is observed that the exchange rate seems to have played a major role in the crisis period by explaining the earning quotient for Indian firms.

This paper concludes that the firm-specific variables and exchange rate channels are quite relevant in explaining the profitability of Indian manufacturing firms. It accepts the hypotheses that size and liquidity enhances whereas leverage discourages the profitability. Few exceptions have been observed during the crisis period. The study also concludes that in the short run, the changes in exchange rate are not increasing profitability, but in the long run, it increases profitability as the volatility of nominal exchange rate is positively impacting profitability. Moreover, the study finds that the nominal exchange rate index is more informative and explains that profitability is better than real exchange rate index in the case of Indian manufacturing firms over the study period.

The managers and the policy makers should give utmost importance to the firm-specific determinants, especially after the crisis period, and consider the appropriate exchange rate to evaluate firm performance for making any change in the policy to make any business profitable.

This study has been conducted over a longer time by using advanced panel data analysis techniques on the recent data. The study period properly captures the crisis time and the research includes different selection of profitability that highlights corporate earnings pattern. Moreover, validation of the exchange rate sensitivity of profitability over nominal and real exchange rate increases the robustness of the study. Moreover, on Indian manufacturing firms, the study is very significant and unique.