What Makes Firms Manage FX Risk?: Evidence from an Emerging Market
35 Pages Posted: 25 Jan 2005
Date Written: December 2004
We examine a number of factors that determine the decision of firms to manage their foreign exchange risk in an emerging market setting. Using survey data on the foreign exchange risk management practices of 223 non-financial firms in Korea, we find that firm size, a proxy for the cost of hedging, is the dominant factor. Consistent with this finding, we also find that firm size has stronger explanatory power for external methods than for internal methods, which have relatively lower costs. Our results also show that, besides firm size, export revenue is an important factor for Korean firms when hedging foreign exchange risk. We find that this is particularly so for public firms, which are subject to various disclosure requirements, and which thus have more incentive to generate a stable stream of net income.
Keywords: Foreign exchange risk, hedging, foreign exchange market, emerging market, Korea
JEL Classification: F31, G15
Suggested Citation: Suggested Citation