CHAPTER 24 - Management of foreign exchange risk: a review article

Abstract

This paper reviews the literature on Foreign Exchange Risk Management (FERM) which has burgeoned during the last decade. Scholars' and practioners' emerging interest in Foreign Exchange Risk Management was spurred by the advent of fluctuating exchange rates in the early seventies as well as by the pronouncement of the infamous FASB Statement No. 8 in 1976 which laid down unambiguous guidelines for consolidating financial statements of multinational corporations. A normative (rather than a market) view of Foreign Exchange Risk Management is taken and accordingly the author reviews first the two key informational inputs necessary for any Foreign Exchange Risk Management program: forecasting exchange rates and measuring exposure to exchange risk. Available decision models for handling transaction and translation exposures are reviewed next. A concluding section identifies gaps in the existing literature and suggests directions for future research.