Risk managers on managing foreign exchange risk
48 Pages Posted: 31 Oct 2023 Last revised: 7 Dec 2023
Date Written: November 9, 2023
We survey risk managers from 110 corporations about hedging foreign exchange rate risk. Consistent with hedge ratios varying without managers' directional views about future FX rates, changes in the premium of forward rates to spot rates and mean-preserving changes in the distribution of future FX rates have substantial effects on hedge ratios. Manager' satisfaction with the outcomes from hedging is maximized when FX risk has no impact on cash flows and is asymmetric -- with the dissatisfaction from large negative outcomes exceeding the satisfaction from comparable positive outcomes. Monte Carlo simulations using a model that combines these findings support the use of dynamic hedging even when managers do not form directional market expectations.
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