Foreign Exchange Exposure and Multinationality

53 Pages Posted: 12 Dec 2012 Last revised: 9 Mar 2014

See all articles by Elaine Hutson

Elaine Hutson

Monash University - Dept of Banking and Finance; Financial Research Network (FIRN)

Elaine Laing

Trinity Business School

Date Written: February 16, 2014


We examine the relation between firms’ foreign exchange exposure and the extent of their multinationality as a proxy for operational hedging. Using a sample of 953 US firms over the period 1999-2006, we show that there is a nonlinear relation between operational and financial hedging, confirming anecdotal evidence that many highly multinational firms do not hedge with derivatives. We find that operational hedging and financial hedging are significantly inversely related to firms’ foreign exchange exposure, providing evidence that the two hedging techniques are complementary for all but the most highly operationally hedged firms. By comparing our findings for 1999-2006 with 1999-2009, we show that this complementarity breaks down when exchange rate volatility is high – as the effectiveness of financial hedging diminishes. An important message for firms is that operational hedges work, and they potentially provide better protection than financial hedging during times of stress.

Keywords: foreign exchange exposure, operational hedging, foreign currency derivatives, multinational firms, degree of internationalization

JEL Classification: F31, F23, G1

Suggested Citation

Hutson, Elaine and Laing, Elaine, Foreign Exchange Exposure and Multinationality (February 16, 2014). Journal of Banking and Finance, Forthcoming, Available at SSRN: or

Elaine Hutson (Contact Author)

Monash University - Dept of Banking and Finance ( email )

PO Box 197
Caulfield East, Victoria 3145
+61399032110 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Elaine Laing

Trinity Business School ( email )

Trinity College Dublin
Dublin, 2

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