Risk managers on managing foreign exchange risk

50 Pages Posted: 22 Feb 2024 Last revised: 12 Nov 2023

See all articles by Philippe Dupuy

Philippe Dupuy

Grenoble Ecole de Management

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration

Luc Meunier

ESSCA School of Management

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Date Written: January 22, 4

Abstract

We survey risk managers from 110 corporations about hedging foreign exchange rate risk. Consistent with hedge ratios varying without managers' directional views about future FX rates, changes in the premium of forward rates to spot rates and mean-preserving changes in the distribution of future FX rates have substantial effects on hedge ratios. Manager' satisfaction with the outcomes from hedging is maximized when FX risk has no impact on cash flows and is asymmetric -- with the dissatisfaction from large negative outcomes exceeding the satisfaction from comparable positive outcomes. Monte Carlo simulations using a model that combines these findings support the use of dynamic hedging even when managers do not form directional market expectations.

Suggested Citation

Dupuy, Philippe and Haushalter, David and Meunier, Luc, Risk managers on managing foreign exchange risk (January 22, 4). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, Available at SSRN: https://ssrn.com/abstract=4613807 or http://dx.doi.org/10.2139/ssrn.4613807

Philippe Dupuy (Contact Author)

Grenoble Ecole de Management ( email )

12 Rue Pierre Semard
Grenoble, Cedex 01 38000
France

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration ( email )

University Park, PA 16802
United States
814-863-7969 (Phone)
814-865-3362 (Fax)

Luc Meunier

ESSCA School of Management ( email )

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