Firmwide Risk Management of Foreign Exchange Exposure by U.S. Multinational Corporations

40 Pages Posted: 11 Jan 2001

See all articles by David Carter

David Carter

Oklahoma State University - Stillwater - Department of Finance

Christos Pantzalis

University of South Florida

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance

Date Written: January 8, 2001

Abstract

This paper investigates the impact of firmwide risk management practices on the foreign exchange exposure of 208 U.S. multinational corporations (MNC) over the period 1994 to 1998. Firmwide risk management is the coordinated use of both financial hedges, such as currency derivatives, and operational hedges, described by the structure of a firm's MNC foreign subsidiary network, to manage currency risk. We find that the use of currency derivatives, particularly forward contracts, is associated with reduced levels of foreign-exchange exposure. Furthermore, MNCs with dispersed operating networks have lower levels of currency exposure. These findings are robust to alternative ways of measuring foreign-exchange exposure. Finally, our results strongly support the view that MNCs hedging in a coordinated manner can significantly reduce exposure to currency risk. These results strongly suggest that operational and financial hedges are complementary risk management strategies.

Keywords: Multinational finance, Risk management, Firmwide risk management, International finance, Hedging

JEL Classification: F30, F31, G15

Suggested Citation

Carter, David A. and Pantzalis, Christos and Simkins, Betty J., Firmwide Risk Management of Foreign Exchange Exposure by U.S. Multinational Corporations (January 8, 2001). Available at SSRN: https://ssrn.com/abstract=255891 or http://dx.doi.org/10.2139/ssrn.255891

David A. Carter

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-5104 (Phone)
405-744-5180 (Fax)

Christos Pantzalis

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

Betty J. Simkins (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

336 Business Building
Stillwater, OK 74078-4011
United States
405-744-8625 (Phone)
405-744-5180 (Fax)

HOME PAGE: http://spears.okstate.edu/~simkins

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