How do Firms Manage their Foreign Exchange Exposure?
33 Pages Posted: 19 Jun 2017 Last revised: 3 Aug 2018
Date Written: July 24, 2017
We examine how firms manage their foreign exchange (FX) exposure using publicly reported data on FX exposure before and after hedging with corresponding hedging instruments. Based on calculated firm-, year-, and currency-specific hedge ratios, we find that about 80  percent of FX firm exposure are managed using risk-decreasing [risk-increasing/risk-constant] strategies. Further, we find that prior hedging outcomes affect the management of current FX exposure, where the exposure is reduced and management adjusts the hedge ratio closer to its benchmark average hedge ratio following prior benchmark losses. When separately evaluating risk-decreasing and risk-increasing positions, we find that prior benchmark losses are only relevant for risk-increasing but not for risk-decreasing positions, i.e., hedging decisions are independent of prior benchmark losses if the intention is to reduce FX exposure.
Keywords: Foreign Exchange; Corporate Risk Management; Selective Hedging; Speculation
JEL Classification: G11, G32, G39
Suggested Citation: Suggested Citation