Exchange Exposure Research Articles

Pengaruh Cash Flow Volatility, Firm Size, Foreign Debt dan Exchange Rate terhadap Hedging (Studi pada Perusahaan Sektor Energi Tahun 2018-2022)

The energy sector has a sharp increase in the value of imports resulting in a trade deficit that causes losses for the country as the rupiah depreciates against the exchange rate. This makes the energy sector vulnerable to exchange rate risk. Any hedging instruments such as swaps, options, forwards & options and natural hedging are generally used by companies to protect foreign exchange exposures. This study aims to examine the effect of Cash Flow Volatility (CFV), Firm Size (SIZE), Foreign Debt (FD) and Exchange Rate (ER) on the use of hedging using various instruments used by companies. By using purposive sampling, 35 energy sector companies in 2018-2022 samples were chosen for the study, and data were gathered from annual repots available on the Indonesia Stock Exchange website. The analysis employed aims to examine the impact of independent variables on the dependent in this study is logistic regression analysis. The results of this study prove that cash flow volatility, firm size and foreign debt have a positive and significant effect on hedging. While the exchange rate has no effect on hedging. The coefficient value of determination in which the variation of the dependent variable can be explained eh the variability of independent variables by 17 percent.

Using Derivatives to Hedge Foreign Exchange Exposure in Russia: Academic Research Review

The review analyzes Russian academic publications from the early 2000s to the present on financial derivatives and their use by Russian non-financial companies to hedge foreign exchange exposure. During this period, studies have made significant progress, from discussing general issues, like the concept of FX exposure, the types of derivatives and the basics of hedging, to original research of hedging effects on company value or cost of equity using generally accepted quantitative methods, such as VaR evaluation. The research demonstrates that hedging practices vary by industry and by the firm size; the 2008 and 2014 financial crises followed by increased FX volatility had a twofold effect on these practices, with somecompanies starting to apply hedging on a larger scale, and others abandoning it at all. The general opinion is that the use of derivatives to hedge foreign exchange exposure, specifically the transaction one, in Russia is much lower than in developed markets due to the market immaturity, regulatory and accounting difficulties, low demand for hedging instruments because of underdeveloped corporate treasury function, high hedging costs, etc. Instead, companies adhere to natural hedging, use non-financial techniques, or accept foreign exchange exposure. Still, most authors agree that to manage FX exposure, companies need to develop a comprehensive strategy; however, commercial flows reorientation due to the current political and economic situation requires developing new FX derivatives and a market for them. Overall, it can be concluded that the studies of Russian practices of using financial derivatives to hedge foreign exchange exposure are relatively small in number compared to foreign ones; data availability limits their factual base to information disclosed by public companies and model examples and does not allow to consider mid-sized and private firms’ practices.

Impact of night trading sessions on volatility of USD futures market in Thailand

Prior to September 2021, USD Futures could only be traded during the regular hours in Thailand Futures Exchange (TFEX). An additional trading session at night, while trading in both London and New York exchanges is active, enables investors to better handle their foreign exchange exposure or speculative needs of the moment. However, understanding volatility behavior is crucial for achieving successful trading. Therefore, this study investigates the impact of night trading sessions on the USD Futures volatility using GARCH family models. The USD Futures market volatility is examined through comparative analysis before and after the introduction of the night trading session. Both TARCH and EGARCH models have revealed no existence of leverage effect over the sample period - from January 2, 2020 to December 30, 2022. The GARCH model has proved to be the most accurate model for describing USD Futures volatility. Following the launch of nighttime trading, USD Futures market has experienced higher and more persistent volatility. In response to an increase in the volatility of USD Futures, TFEX should increase its margin requirement and monitor the speculative movements in futures market for their possible destabilizing effect. Investors should also adjust their hedge ratio to manage risk more appropriately and incorporate an extended period of increased uncertainty into their trading strategies.

Navigating Global Finances: An In-depth Analysis of Foreign Exchange Exposure in Multinational Companies - Insights from Industry Practitioners

Navigating Global Finances: An In-depth Analysis of Foreign Exchange Exposure in Multinational Companies - Insights from Industry Practitioners

The Effect of Foreign Exchange Exposure on the Financial Performance of MNCs in Rwanda

The Effect of Foreign Exchange Exposure on the Financial Performance of MNCs in Rwanda

DETERMINANTS OF FOREIGN CURRENCY HEDGING AND IT’S IMPACT ON FIRM VALUE

<p>Hedging through derivative instruments is a risk management action to reduce losses due to foreign exchange exposure. This research aims to examine the influence of liquidity, company size, leverage, growth opportunity, financial distress, profitability on company hedging decisions and to find out whether hedging activities have an effect on company value. The research sample consisted of 39 companies in the basic industry and chemical goods sector listed on the Indonesia Stock Exchange in 2014-2018. This research uses two stages of testing to analyze the data. The first stage uses logistic regression to test decision determinants hedging company. The second stage uses testing Independent Sample T-Test to determine the impact of activities hedging on company value and knowing which groups of companies have superior value. The research results show that leverage, company size and growth opportunity have a positive effect on the probability of a company's hedging decisions. Meanwhile, financial distress, liquidity and profitability have a negative effect on the probability of a company's hedging decisions. There is a significant difference in the average value between companies that carry out hedging activities and companies that do not carry out hedging activities.</p>

The Study of Foreign Exchange Exposure of Vietnamese’ Companies

Most of previous studies about exchange rate exposure focus on big international and trading companies in developed markets that are proved to exist. This paper uses Vietnam as a developing market and examines a sample of domestic companies to see whether they are influenced by exchange rate risks. As expected, Vietnamese domestic companies are influenced by exchange rate exposure with the fluctuations of USD, EUR and JPY during the period 2011-2018 with significant relationship with EUR, JPY and no relationship with USD. No industry effect is shown in this study. The results have useful implications for individual investors, domestic company managers and policy makers.

Exchange rate co-movements and corporate foreign exchange exposures: A study on RMB

Exchange rate co-movements and corporate foreign exchange exposures: A study on RMB

How Do Firms Manage Their Foreign Exchange Exposure?

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 (20) percent of FX firm exposure is 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.

The Wavelet Multi-Scale Analysis of Exchange Rate Exposure: An Application to Malaysian Consumer Products and Services Sector

Objective – Past efforts in assessing foreign exchange rate exposure assume homogeneity in the level of exposure across time horizons which seems to be impractical due to the dynamic nature of comovement between firm value and exchange rate. Methodology – Given this, the study aimed to investigate the multi-scale relationships between changes in exchange rates and firm values of 56 multinational corporations in the consumer products and services sector from January 2000 to December 2020. Findings – The novelty of the study lies upon the application of Maximal Overlap Discrete Wavelet Transformation (MODWT) method which allows decomposition of a single time series domain into different time domains. The fragmentation into multiple time domains allows the measurement of scale-dependent foreign exchange exposure. As a result, the study discovered a non-monotonic trend for wavelet scale j of currency exposure across time scales. In particular, there was a gradual increase in the magnitude of beta exchange exposure and the proportion of exposed firms from low to high time scales. This finding suggested that firm value is more sensitive to changes in the exchange rate within a widened time domain. Novelty – The study demonstrated on how the wavelet technique can be used to measure foreign exchange risk and aided firm managers and market participants in managing foreign exchange risk for a specific time interval. Type of Paper: Empirical JEL Classification: E42, F31, F39 Keywords: Currency exposure; multi-horizon exchange rate; Malaysian Sectors; Wavelet Analysis; MODWT. Reference to this paper should be made as follows: Wahab, H.A; Nasir, N.A.M. (2023). The Wavelet Multi-scale Analysis of Exchange Rate Exposure: An Application to Malaysian Consumer Products and Services Sector, J. Fin. Bank. Review, 8(1), 58 – 72. https://doi.org/10.35609/jfbr.2023.8.1(3)

Does Using Hedging Instruments Reduce Foreign Exchange Exposure?

Does Using Hedging Instruments Reduce Foreign Exchange Exposure?

The Multi-horizon Exchange Rate Exposure of Consumer Products and Services Sector in Malaysia

After the abolishment of fixed exchange regime under the Bretton Woods System in 1970s, the issue of foreign exchange risk expecially among multinational corporations operating under small and open economies of Malaysia remains relevant till today. According to Abdul Wahab et al. (2017) and Adler and Dumas (1984), exchange rate exposure refers to the extent of firm's sensitivity to exchange rate fluctuations. While there has been growing interest in examining foreign exchange risk incidence under Malaysia market, however limited studies have been focusing on single sector of consumer products and services in Malaysia. Under Bursa Malaysia, the sector consists of several sub-fields including agricultural products, automotive, food and beverages, household goods, personal goods, retailers and travel and leisure services. Given the wide range of products and services, the corporations under the sector have been involved in vigorous cross-border trading activities. The consumer products and services equities become the second largest sector in Bursa Malaysia which constitues 15.89% of total stocks in main market of Bursa Malaysia in July 2021 with a 265.02 billion of total market capitalization. In terms of methodological issue, the study addresses on the bias in exchange risk pricing in previous studies. Specifically, majority of past studies assume homogeneity of exchange risk across time domains which seems to be unrealistic. Capital market contains wide range of participants with heterogenous investment holdings and expectations. To address time domain bias, the study adopts Maximal Overlap Discrete Wavelet Transformation (MODWT) in foreign exchange risk pricing to decompose a single time domain series into multiple time domains. Given this, the primary objective of the study is to examine the extent of multi-horizon foreign exchange exposure of consumer products and services sector in Malaysia from January 2000 till December 2020. Keywords: Currency Exposure, Wavalet Technique, MODWT, Malaysian Consumer Sector

An Assessment of Currency Exposure of Non-Financial Firms in ASEAN-4: Insights using the Stock Returns and Cash Flow Methodologies

This study examines the extent and nature of foreign exchange exposure in 405 listed corporations operating in the ASEAN-4 nations, Indonesia, Malaysia, Singapore, and Thailand. The study period of 23 years, from 1995 to 2017, covers the two major crisis periods, the Asian financial crisis (AFC) of 1997 and the global financial crisis (GFC) of 2008. Our study improves on earlier work by using two alternative assessment methods, i.e., stock returns (SR) and cash flow (CF) methods. We report several interesting and noteworthy results. First, we find that the stock returns approach results in a higher incidence of exchange rate exposure relative to the cash flow method. Specifically, about 65% and 28% of the total ASEAN-4 firms had significant exposure to all currencies under the stock returns and cash flow methods, respectively. Second, we find the sample firms to have predominant exposure to the US dollar, signifying the important role played by the United States (US) as the major trading partner of the ASEAN-4. Third, when evaluating time-varying exposure, we find that the incidence of the exchange rate exposure is event-specific. Most of our sample firms were highly exposed to exchange rates during the mid-points of the AFC and the GFC.

Foreign exchange exposure and analysts’ earnings forecasts

This study examines how movements in a firm’s exposure to foreign exchange (forex) rates affect the properties of analysts’ earnings forecasts. Our results suggest that analysts’ forecast errors and dispersion increase with an increase in forex exposure within firms. These findings are robust to a wide range of robustness tests, including a quasi-experimental setting based on the sudden unpegging of the U.S. Dollar against the Chinese Yuan. Additional tests reveal that analysts spend more effort forecasting when firms experience an increase in forex exposure. Consistent with an increase in uncertainty of firm outcomes representing the primary channel through which forex exposure affects analysts’ forecasts, we find that the effect of forex exposure is heightened in the presence of greater volatility in the U.S. Dollar. However, we also find that more readable annual reports and higher media coverage can help improve the quality of analysts’ forecast properties for firms with increasing forex exposure. We also present evidence of some benefits analysts can realize from coverage of high forex exposure firms through generating greater stock trading and securing positions in more prestigious brokerage firms.

Determinants of Foreign exchange exposure during the COVID-19 crisis: A Multi-country evidence

ABSTRACT The research question of which firm-level factors make firms more vulnerable to exchange rate fluctuations during periods of crisis has rarely been explored by prior literature. Using a large sample of 1577 firms from 9 developed and 11 emerging countries, this study presents a comprehensive analysis of how firm-level factors affect firms’ foreign exchange exposure before and during the COVID-19 crisis. The results provide evidence of a substantial increase in firms’ linear exposure during the COVID-19 period. The cross-sectional analysis reveals that the effects of firm-level variables on exposure are more pronounced during crisis periods and are different from non-crisis periods. Firms that have effective asset utilization or large operating profit margins remain less exposed during times of stress. Contrary to hedging theory, firms that have high incentives to hedge such as firms with high financial leverage become highly exposed to currency fluctuations during crisis periods. The interaction analysis provides further evidence that firms with high leverage can limit their foreign exchange exposure during periods of crisis if they have high asset turnover or high operating profits. The results offer important practical implications to firms for risk management during periods of crisis.

Internationalization, foreign exchange exposure and firm risk

This paper examines the effect of internationalization on variation in operating performance. Analyzing a sample of non-financial firms in Switzerland during 2000–2020, we document two key findings. First, internationalization is positively associated with variation in operating performance. However, neither operational-hedging internationalization nor revenue-seeking internationalization moderates the relation between internationalization and variation in operating performance. Second, our findings show that the unhedged foreign exchange exposure neither strengthens nor weakens the effect of internationalization on variation in operating performance. Further analyses show that internationalization is not associated with firm performance.

A STUDY OF DETERMINANTS OF FIRM VALUE OF INDIAN IT SECTOR: WITH SPECIAL REFERENCE TO EFFECT OF FOREIGN EXCHANGE RISK

Foreign currency risk is one of the most common types of risk that foreign businesses face, and risk management has become one of the most important aspects of comprehensive financial management in recent years. The exposure of a company to changes in foreign exchange prices is called foreign exchange risk, whilefirm value is an economic metric that reflects the market value of a company as a whole, i.e. the value that should be distributed among its shareholders and debt holders. The main objective of this study is to identify the effect of foreign exchange exposure on Firm Value for selected Indian IT companies. Five IT companies covering the tenyear data (2009 to 2018) have been selected for the study. Secondary data have been collected from their annual reports which have been analyzed through regression and analysis of variance with a view to predict the effect of foreign exchange risk. The study reveals that Foreign Exchange Risk is least consistent variable and there is a negative correlation between Foreign Exchange Risk on Firm Value.Result of Regression Analysis shows that there isinsignificant positive impact of Foreign Exchange Risk on Firm Value

A Survey of Multinational Company Accounting Foreign Exchange Exposure

A Survey of Multinational Company Accounting Foreign Exchange Exposure

INTERNATIONAL TRANSFER PRICING AND TAX DISCLOSURE ON MULTICULTURAL COMPANIES IN NIGERIA

The study examines the effect of transfer pricing on tax consideration of multicultural companies in Nigeria. It specifically examined the effect of tax expenses, tunneling incentive as well as foreign exchange exposure on tax disclosure of Multicultural companies in Nigeria. The study adopted an ex-post-facto research design and secondary data was gathered to analyze the relationship between the variables. Purposive sampling technique was used to select 76 Multicultural companies in Nigeria. Data for the study were gathered from annual reports of selected firms for the period of 11 years (2010-2020) and analyzed using Generalized Method of Moments (GMM) estimator. Panel data was used which consists of 760 observations analyzed using multiple regression model. Robust regression model was employed to test the effect of transfer pricing and tax consideration. The Hausman test result revealed that tax expenses and tunneling incentives have positive and significant effect on tax disclosure with coefficient of 0.0352 and 0.1282 which is significant at 5% (p=0.005,0.039) respectively, foreign exchange exposure has negative and significant effect on tax disclosure with coefficient of -0.0935 which is significant at 5% (p=0.248). The study therefore, concluded that transfer pricing have strong statistical relationship with tax consideration of selected multicultural companies in Nigeria. The study recommends that non-controlling interest, foreign exposure and debt ratio are important variables to consider when the management of selected multicultural companies in Nigeria decides on tax disclosure

코스닥 기업의 파생상품 사용과 환노출

This study analyses the relationship between using derivatives and the foreign exchange exposure of non-financial companies in the KOSDAQ market from 2011 to 2019. The study shows that export ratio, foreign currency debt ratio, size of company, and debt ratio increased the likelihood of using derivatives. Moreover, it was found that companies with high dividend ratios and those with low largest shareholder holding ratios had a higher likelihood of using derivatives. This indicates that companies in the KOSDAQ market actively consider risk management in their decisions to use derivatives. An analysis of the relationship between the use of derivatives and foreign exchange exposure revealed that foreign currency liabilities had a significant relationship with foreign exchange exposure. These results suggest that companies need to devote more attention to the management of foreign exchange exposure from foreign currency liabilities. The results of this study demonstrate that KOSDAQ market companies use derivatives appropriately to manage their foreign exchange exposure. Considering that KOSDAQ companies incurred substantial losses from the derivatives used to manage their foreign exchange exposure during the global financial crisis, the results of this study have significant implications for understanding KOSDAQ market companies