The Foreign Exchange Exposure Management Practices of Finnish Industrial Firms

This study employs questionnaire survey and financial accounting data to extend earlier empirical work on the foreign exchange (FX) exposure management practices of Finnish industrial firms. The paper concentrates on: (i) the form that FX corporate hedging policy takes; (ii) the control of FX procedures and trading; and, (iii) our respondents' perceptions about their ability to predict FX rate changes for hedging decisions. Our results indicate that the extent to which firms hedge FX exposure depends on the type of exposure and the form that FX hedging policy takes. Also, a significant number of the firms pursue FX hedging strategies on the expectation of attaining trading profits and this strategy appears to be accommodated within their FX policies. This feature is not explicitly demonstrated in previous studies. Finnish firms hedge a much higher proportion of both transaction and translation exposures compared to economic exposure. We partly attribute this emphasis to the requirements of the Finnish Accounting Act, which came into effect in 1993. The organisational, historical and financial settings of the firms also have significant impacts on exposure management practices. The overall implication of those results is that firms respond to changes in the financial, economic and regulatory environments in which they operate.     

Hedging Foreign Exchange Exposure: Risk Reduction from Transaction and Translation Hedging

Using a sample of Swedish firms we investigate the risk reducing effect of foreign exchange exposure hedging. Further, we investigate risk reduction from using different hedging instruments, and particular interest is directed towards the impact of transaction exposure hedges and translation exposure hedges respectively. We find that firms' foreign exchange exposure is increasing with the level of inherent exposure, measured as the difference between revenues and costs denominated in foreign currency, and that it is decreasing with firm size. We find a significant reduction in foreign exchange exposure from the use of financial hedges. The evidence suggests that the usage of foreign denominated debt as well as currency derivatives reduce firms' foreign exchange exposure. Further, we find that transaction exposure hedges significantly reduce exposure, and that translation exposure hedges also reduce exposure. A possible explanation for the latter is that translation exposure approximates the exposed value of future cash flows from operations in foreign subsidiaries (i.e. economic exposure). If so, by hedging translation exposure, economic exposure is reduced.     

A Firm-Specific Analysis of the Exchange-Rate Exposure of Dutch Firms

We examine the relationship between exchange‐rate changes and stock returns for a sample of Dutch firms over 1994–1998. We find that over 50 per cent of the firms are significantly exposed to exchange‐rate risk. Furthermore, all firms with significant exchange‐rate exposure benefit from a depreciation of the Dutch guilder relative to a trade‐weighted currency index. This result confirms that firms in open economies, such as the Netherlands, exhibit significant exchange‐rate exposure. We collect unique information on the most relevant individual currencies for each firm with respect to their influence on firm value. Our results indicate that the use of a trade‐weighted currency index and the use of individual exchange rates are complements. We also measure the determinants of exchange‐rate exposure. As expected, we find that firm size and the foreign sales ratio are significantly and positively related to exchange‐rate exposure. In contrast with our hypothesis, off‐balance hedging using derivatives has no significant effects. Finally, in line with theory, we find that exposure is significantly reduced through on‐balance sheet hedging, i.e., through foreign loans and by producing in factories abroad.     

Working Capital Management,the Credit Crisis,and Hedging Strategies: Canadian Evidence

This study uses a sample of Canadian natural resource firms during the global financial crisis (GFC) of 2007–2008 to examine the influence of firm hedging strategies on their working capital management. Our evidence implies that increased cash holdings and derivatives are alternative ways of hedging risk, and also provides another perspective on the U.S. “trapped cash” controversy as our sample firms are not R&D intensive and do not face the same tax regime as U.S. multinationals.     

Inflation and interest rate derivatives for FX risk management: Implications for exporting firms under real wealth

Firms that export goods face risks such as product price, cost, and exchange rate risks. Price and cost risks can substantially reduce the FX hedging performance in real wealth. We thus investigate hedging strategies that are intended to improve the performance of the FX hedge in real terms using inflation and interest rate derivatives. The impact of these additional instruments is not clear and has only been briefly analyzed in the hedging literature so far. For this purpose, we derive variance-minimizing hedge positions of an exporting firm. A cointegrated VAR and bootstrap methods are used to evaluate the efficiencies of several hedging strategies. While inflation derivatives work better in the short run, interest rate derivatives perform better over longer hedge horizons.     

Estimating Cost of Equity: Do You Need to Adjust for Foreign Exchange Risk?

Empirical reports of priced foreign exchange (FX) risk raise the question of whether managers should adjust their cost of equity estimates for FX risk. To study this question, we empirically compare the cost of equity estimates of several risk–return models, including some that have explicit FX risk premia and others that do not. We find that adjusting for FX risk makes little difference, on average, in the cost of equity estimates, even for small firms and firms with extreme FX exposure estimates.     

自由贸易试验区建设影响企业外汇衍生品投资吗?

本文采用2010～2019年A股上市公司样本,探究自由贸易试验区建设对企业外汇衍生品投资的影响.研究发现,自贸试验区设立后,试验区内及其所在地上市公司外汇衍生品投资倾向显著提升.异质性检验结果表明,这一关系在面临风险更高、资产周转能力较差、多国化经营程度较低、处于激烈竞争行业以及面临融资约束的样本中更为明显;在经济发展...     

Translation Exposure Hedging Post SFAS No. 52

Translation exposure hedging is frequently said to have begun after firms adopted SFAS No. 8 and assumed to have ceased–or at least decreased–after adoption of SFAS No. 52 due to different treatments of translation gains (losses). Based on proprietary data, this study presents evidence from a small sample of firms which would be predicted to cease hedging translation exposure, but of which the majority did not.
The study focuses on eighteen firms which exclude at least 50% and up to 100% of the translation gains (losses) from the income statement after adopting SFAS No. 52. Of those eighteen firms, only seven ceased hedging. The other eleven firms not only continued hedging translation exposure, but hedged translation exposure of only those subsidiaries whose translation gains (losses) are now excluded from the income statement.
Characteristics which might explain the different decision are investigated: proportion of assets which are nonmonetary; the proportion of net assets located abroad; the geographic dispersion of subsidiaries; and the estimated effect on the balance sheet and income statement of changing from the temporal method to the current rate method of translation.
Univariate test results indicate that the geographic dispersion of die foreign subsidiaries as well as the proportion of net assets located abroad differ significantly between firms which ceased hedging and those which continued hedging after adopting the standard. Weak evidence of differential effects of the change to the current rate method on individual firm income statements and of different composition of assets between the two groups also was found. Multivariate analysis, using a linear probability model as well as a randomization procedure, provided weak results corroborating the significance of the proportion of net foreign assets to consolidated assets in differentiating between firms which ceased hedging and those which continued.     

Asymmetric Foreign Currency Exposures and Derivatives Use: Evidence from France

This paper provides evidence on the asymmetric sensitivity of stock returns of French firms to exchange rate risk and the effect of foreign currency (FC) derivative use in alleviating this risk. The results show that FC exposure is frequently asymmetric and differs with respect to the US dollar (USD) and non‐USD currencies. Cross sectional analysis provides evidence that FC derivatives use has a significant effect on reducing FC exposure to appreciations and depreciations of non‐USD currencies and depreciations of the USD, but not to appreciations of the USD.     

Derivatives Usage in Risk Management by US and German Non-Financial Firms: A Comparative Survey

This paper is a comparative study of the responses to the 1995 Wharton School survey of derivative usage among US non-financial firms and a 1997 companion survey on German non-financial firms. It is not a mere comparison of the results of both studies but a comparative study, drawing a comparable subsample of firms from the US study to match the sample of German firms on both size and industry composition. We find that German firms are more likely to use derivatives than US firms, with 78 percent of German firms using derivatives compared to 57 percent of US firms. Aside from this higher overall usage, the general pattern of usage across industry and size groupings is comparable across the two countries. In both countries, foreign currency derivative usage is most common, followed closely by interest rate derivatives, with commodity derivatives a distant third. In contrast to the similarities, firms in the two countries differ notably on issues such as the primary goal of hedging, their choice of instruments, and the influence of their market view when taking derivative positions. These differences appear to be driven by the greater importance of financial accounting statements in Germany than the US and stricter German corporate policies of control over derivative activities within the firm.     

Derivative Usage by Nonfinancial Firms in Sweden with an International Comparison

This paper provides survey evidence on the use of derivatives among Swedish nonfinancial firms. The evidence is compared with the findings by Bodnar et al. (1995, 1996) and Berkman et al. (1997) for the USA and New Zealand, respectively. By comparing firms in Sweden with firms in New Zealand and the USA differences in derivative usage can be related to differences in their underlying economies and history of trading in derivatives. Among other issues, the results showed that (1) 52% of the nonfinancial firms in Sweden used derivatives compared with 53% in New Zealand and 39% in the USA; (2) the usage of derivatives was more common among larger than among smaller firms; (3) the principal use of derivatives was for hedging purposes and those firms that engaged in speculative activity tended to be larger rather than smaller firms; and (4) lack of knowledge about derivatives within the firm was the issue of most concern for financial directors. The latter was in contrast with the USA where lack of knowledge was the issue of least concern.     

Corporate risk management and asymmetric information

We discuss the effect of information on corporate risk management decisions when the information is asymmetric between the insider and the market. We suggest an explanation for previous contradiction between existing theories and empirical findings, which state that fewer small firms choose to hedge. We consider two different scenarios of information revelation to the market, and find hedging cost is not the main reason preventing firms from hedging. Rather asymmetric information plays the decisive role in a firm's risk management policy. One of the empirical implications we find is that cash flows with high variances may discourage firms from hedging even when they face high financial distress costs.     

The Use of Forward Contracts for Hedging Currency Risk

This paper derives an optimal rule for hedging currency risk in a general utility framework. Ex ante hedging performance of the forward markets is examined using the optimal hedge ratio derived from the utility model and an optimal rule derived from another model (excess return per unit risk) suggested in the hedging literature. Results of this study indicate a naive (one-to-one) hedge performs similarly to the optimal hedge ratios under either model. An implication of this study is that financial managers of multinational firms should simply follow a one-to-one rule when hedging foreign exchange risk in the forward markets.     

Input Hedging,Output Hedging,and Market Power

We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to “sector play.” Furthermore, firms with market power that hedge outputs have incentives to over‐produce and distort market prices. In rational markets, such hedging will be expensive and we expect to see a negative relationship between hedging and market power in “output industries” but not in “input industries.” We test these predictions on a sample of S&P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also help in reconciling conflicting results in prior studies.     

Interest rate derivatives and risk exposure: Evidence from the life insurance industry

Our primary aim in this study is to determine the relation that exists between the use of interest rate derivatives by public-traded life insurance firms and their exposure to interest rate risk. Based upon the annual reports and 10-K filings of US life insurers, covering the years 2000–2016, we find that those insurers with greater inherent exposure to interest rate risk also have a propensity for extensive engagement in the use of interest rate derivatives. We further reveal that life insurers with a propensity for the extensive use of such instruments during the 2000–2009 sub-period tend to have greater observable exposure to interest rate risk. However, during the 2010–2016 sub-period life insurers that use more interest rate derivatives tend to have smaller interest rate exposure. Since restructuring the balance sheet of a life insurer is costly, our results suggest that managers probably use derivatives as a means of modifying their risk tolerance to achieve the same results of direct duration matching.     

Hedging to market-wide shocks and competitive selection

This paper examines hedging against a large market-wide shock in a model with heterogeneous firms and sunk costs of entry. If hedging is voluntary only the most efficient firms hedge against this shock, a finding in line with empirical evidence but at odds with standard motivations for risk management. Hedging affects the critical level of the marginal cost needed to operate in the market. A setting with mandatory hedging is associated with stronger competition than when hedging is voluntary which, in turn, is associated with stronger competition than when hedging is unavailable.     

Optimal Hedging Strategies and Interactions between Firms

This paper studies corporate risk management in a context of financial constraints and imperfect competition in the product market. The paper shows that interactions between firms affect their hedging strategies. As a general rule, firms’ hedging demands decrease with the correlation between their internal funds and investment opportunities. Moreover, when a firm’s hedging demand is high in the case where investments are strategic substitutes, its hedging demand is low in the case where investments are strategic complements and vice versa.     

International tenders and futures hedging

This paper examines the optimal bidding and hedging decisions of a risk‐averse firm that takes part in an international tender. The firm faces multiple sources of uncertainty: exchange rate risk, risk of an unsuccessful tender, and business risk. The firm is allowed to trade unbiased currency futures contracts to imperfectly hedge its contingent foreign exchange risk exposure. We show that the firm shorts less (more) of the unbiased futures contracts when its marginal utility function is convex (concave) as compared with the case that the marginal utility function is linear. We further show that the curvature of the marginal utility function plays a decisive role in determining the impact of currency futures hedging on the firm's bidding behavior. Sufficient conditions that ensure the firm bids more or less aggressively than in the case without hedging opportunities are derived. Copyright © 2006 John Wiley & Sons, Ltd.     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.     

Local institutional shareholders and corporate hedging policies

This paper examines the effectiveness of monitoring function from institutional investors on corporate hedging strategy in Taiwan over the period from 2005 to 2012. The empirical results show that institutional investors are effective monitors of corporate risk management to enhance the probability and extent of hedging. In addition, the monitoring function from institutional investors is effective for mitigating the risk-shifting problem of high leveraged firms. Moreover, local institutional investors play more important role in monitoring distressed firm's magnitude of hedging than foreign institutional investors. These results are robust to the consideration of endogeneity, selection bias, and industrial difference. This is the first empirical evidence in the literature regarding the monitoring effect of institutional investors on risk management strategy from the angle of monitoring costs.