What Makes Firms Manage FX Risk?: Evidence from an Emerging Market

35 Pages Posted: 25 Jan 2005

See all articles by Woochan Kim

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Taeyoon Sung

Yonsei University, School of Economics

Date Written: December 2004

Abstract

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

Kim, Woochan and Sung, Taeyoon, What Makes Firms Manage FX Risk?: Evidence from an Emerging Market (December 2004). KDI School of Pub Policy & Management Paper No. 05-01. Available at SSRN: https://ssrn.com/abstract=653422 or http://dx.doi.org/10.2139/ssrn.653422

Woochan Kim (Contact Author)

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

Taeyoon Sung

Yonsei University, School of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea, Republic of (South Korea)
+82-2-2123-5494 (Phone)

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