Exchange Rate Risk Management: Evidence from East Asia

47 Pages Posted: 19 Nov 2000  

George Allayannis

University of Virginia - Darden School of Business

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001

Abstract

The recent East Asian (EA) financial crisis provides a natural experiment for investigating foreign-exchange risk management by non-financial corporations. During this period, the financial crisis exposed local firms to large depreciations in exchange rates and decreased access to foreign capital. We explore the exchange rate hedging practices of firms that hedge foreign debt exposure in eight EA countries between 1996 and 1998. Our paper makes three primary contributions. First, we identify and characterize EA companies that use foreign currency derivatives. This includes documenting differences in size, domestic and foreign debt exposures, and financial characteristics. Second, we investigate the factors important in the use of foreign currency derivatives. In contrast to studies of US firms, we find limited support for existing theories of optimal hedging. Instead, we find that firms use foreign earnings as a substitute for hedging with derivatives and evidence that EA firms engage in "selective" hedging. Third, we investigate the relative performance of hedgers during and after the crisis. We find no evidence that EA firms eliminate their foreign exchange exposure by using derivatives. More
specifically, firms using derivatives before the crisis perform just as poorly as nonhedgers during the crisis. Post-crisis, firms that hedged performed somewhat better than nonhedgers, but this result appears to be explained by a larger post-crisis currency exposure for hedgers (an exchange rate risk premium), due to limited access to derivatives during that period.

Suggested Citation

Allayannis, George and Brown, Gregory W. and Klapper, Leora F., Exchange Rate Risk Management: Evidence from East Asia (February 2001). Darden Business School Working Paper No. 01-09; World Bank Policy Research Working Paper No. 2606. Available at SSRN: https://ssrn.com/abstract=250719 or http://dx.doi.org/10.2139/ssrn.250719

George Allayannis (Contact Author)

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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