UK Multinationals' Effective Use of Financial Currency-Hedge Techniques: Estimating and Explaining Foreign Exchange Exposure Using Bilateral Exchange Rates

17 Pages Posted: 12 Sep 2008

See all articles by Stephen D. Makar

Stephen D. Makar

University of Wisconsin - Oshkosh

Stephen P. Huffman

University of Wisconsin Oshkosh

Abstract

Using a unique dataset of recently available accounting disclosures, this study examines the relationship between UK multinationals' stock returns and changes in the principal exchange rate to which each firm is most exposed. We find more firms with significant foreign exchange exposure estimates using this firm-specific principal currency data, compared with those exposure estimates using the broad exchange rate index data prevalent in prior studies. The cross-sectional variations in such principal-currency exposure estimates are explained in relation to the financial currency-hedge techniques that each firm specifically identifies as being used to manage its currency risk. In particular, we provide evidence that firms effectively use foreign currency derivatives and foreign-denominated debt to reduce the currency risk associated with the bilateral exchange rate to which they are most exposed. This study is important to both the academic and the practitioner communities because it represents the first use of publicly available UK disclosures to improve the estimation and explanation of foreign exchange exposure.

Suggested Citation

Makar, Stephen D. and Huffman, Stephen P., UK Multinationals' Effective Use of Financial Currency-Hedge Techniques: Estimating and Explaining Foreign Exchange Exposure Using Bilateral Exchange Rates. Journal of International Financial Management & Accounting, Vol. 19, Issue 3, pp. 219-235, Autumn 2008, Available at SSRN: https://ssrn.com/abstract=1266943 or http://dx.doi.org/10.1111/j.1467-646X.2008.01022.x

Stephen D. Makar (Contact Author)

University of Wisconsin - Oshkosh ( email )

College of Business Administration
Oshkosh, WI 54901
United States
414-424-0158 (Phone)
414-424-7413 (Fax)

Stephen P. Huffman

University of Wisconsin Oshkosh ( email )

800 Algoma Blvd
Oshkosh, WI 54901
United States
9202330196 (Phone)
9204247413 (Fax)

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