Exchange Exposure Research Articles

Timing liquidity in the foreign exchange market: Did hedge funds do it?

Risks associated with international investments such as foreign exchange (FX) exposure have recently gained increasing attention, especially those related to the liquidity conditions of the FX market after the financial crisis of 2007–2008. This paper investigates whether hedge funds time liquidity in the FX market and to what extent this contributes to their investment returns. We focus on hedge funds that invest globally and transact in the FX market. Our findings, which are statistically robust, show the liquidity timing abilities of these hedge funds may be attributed to their investing styles and the types of assets they manage, where a stronger liquidity timing ability may be demanded of systematic futures hedge funds to cushion against exposure underlying foreign assets.

Enterprise Risk Management with Foreign Exchange Exposures : Evidence from Taiwan Tourism Industry

This paper adopts ARIMA model to explore the relationship between business performance and the fluctuation of exchange rate. The empirical results show that the impacts of the fluctuation of foreign exchange rate on the corporate performance of tourism industry are significant and different across currencies and the size of a tourism company. Furthermore, based on the framework of Kim (2013) , a modern portfolio theory proposed by Markowitz (1952) gives an optimal allocation of foreign exchange for a firm’s decision-makers, which would avoid exchange rate risk exposure and thus complete the construction of enterprise risk management system (ERM) to reduce losses.

Factors that Affect the Derivatives Usage of Non-Financial Listed Firms of Pakistan to Hedge Foreign Exchange Exposure

This study aims to investigate the factors that affect the derivatives usage of non-financial listed firms of Pakistan to hedge foreign exchange exposure by using data of 51 non-financial firms listed on Pakistan stock exchange from 2010-2013. The dependent variable was derivative usage which was used as dummy since no financial information was disclosed in company annual reports but the decision of usage or not. Non-parametric tests were uses which is univariate analysis to calculate the mean difference between users and non-users of derivative usage for hedging purposes. Further, logistic regression model was used to analyze the impact of financial distress costs, tax convexity, underinvestment problem, profitability, managerial holdings of the company and foreign sales on firm’s decision to whether they use FX derivatives for hedging purposes or not. The result shows that financially distressed firms, having lower managerial holdings and lower interest coverage ration with high foreign sales are using FX derivatives in Pakistan.

Foreign exchange exposure and multinationality of Indian firms

The research paper examines the relationship between the foreign exchange exposure of the S&P BSE500 companies and the extent of their multinationality. The level of multinationality and extent of foreign exchange exposure measured individually for 357 constituent firms depending on the availability of data. Foreign earnings to total earnings ratio measured multinationality, while a two factor regression coefficient with share price returns as a dependent variable and USD/INR rate as independent variable and S&P 500 index returns as a control variable. Annual Financial data and monthly market data for all constituent companies from January 2007 to December 2015 (9 years) was collected from Prowess database, BSE and RBI website. The results provides no conclusive evidence on a strong relationship between the variables and also there was no causal relationship established using Granger Causality Test.

The Enterprise Risk Management of Foreign Exchange Exposures: Evidence from Taiwanese Hospitality Industry

For this paper, I use the ARIMA model to study the relationship between business performance and exchange rate fluctuations. Through this model, the empirical results shows that the influences of foreign exchange rate fluctuations on the tourist hotel business performance are significant and different across currencies and firms. Furthermore, according to the framework of Kim (2013) we employ the modern portfolio theory proposed by Markowitz (1952) to give an optimal foreign exchange allocation for each tourist hotel company's financial decision-makers, which will avoid the risk of exchange rate fluctuations expose and reduce losses due to the fluctuations of exchange rates, and complete the construction of enterprise risk management system (ERM).

MANAGEMENT OF FINANCIAL RISKS IN INTERNATIONAL TRADE FINANCING

Sale of products with delayed payment, i.e. credit supported sale is a major force in international trade and an imperative in today’s business world. In the contemporary international commerce market positions and negotiation power have changed mainly in favor of buyers, who on the other hand, regularly request credit – based purchasing. Faced with competition on the global market, sellers intending to sell their goods and services on the market are enforced to offer favorable conditions, which is in fact sale with delayed payment. Presence on the global market offers possibilities for profit-making, but at the same time export-oriented businesses are surrounded by potential risks. The major problem in fact is the re-payment of the receivables, which is a result of the time interval from the moment when the foreign buyer will receive the delivered goods to the moment when he will pay the agreed amount. Risk management and exposure management or hedging exposure, are applied frequently by financial managers, managing the funds of a company, in order to enable exposure cover and reduce the potential instability for the company. The exposure management in case of foreign currency or exchange exposure represents an integral part of the financial function of the company, which acts globally, primarily multinational companies.International trade transactions are administered in far more complex conditions than those on the local/national market. Therefore, the stress should be on the crucial importance of the economic and financial risk management in the domain of international trade finance.

Modelling foreign exchange rate transaction exposure of UK insurance companies

Purpose The purpose of this paper is to study the sensitivity of foreign exchange exposure through the cash flow estimation method using a sample of 59 UK insurance companies. This approach allows a decomposition of exposures into short- and long-term components. By revealing the nature of their cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures. Design/methodology/approach Martin and Mauer’s (2003, 2005) three-stage model is used to estimate foreign exchange rate transaction exposures for the sample of 65 UK insurance companies over the period 2004-2013. However, this paper has one important innovation to this method. Instead of the model used in previous papers, the paper uses a model from the actuarial field that was proposed by Blum et al. (2001) for modelling foreign exchange rates with their relevant constituents (inflation and interest rate). Findings The evidence shows that the currency transaction exposure for non-life insurers is greater than that of life insurers. Moreover, the author finds that large insurers exhibit lower frequencies of foreign exchange transaction exposure than small insurers. Originality/value The value of this paper comes from the fact that revealing the nature of cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures.

The Foreign Exchange Exposure of Domestic Companies in Eurozone: Case of the Baltic States

JEL Classification: G32, F31 Introduction In an increasingly globalizing world, companies in small open economies such as Baltic are not isolated from the effects of international economic cycles, currency movements, and global competition. Since mid-2008, foreign exchange markets have become more volatile due to the financial crisis in 2008 and the currency wars. Between mid-2012 and mid-2014, the euro increased in value by 10% compared to other currencies, but this trend has reversed over the last six months, and the effective exchange rate has fallen by 5.2%. Between spring 2014 and late January 2015, the euro depreciated by almost 20% against the US dollar and by about 10% against the British pound, driven by increasingly diverging monetary policy stances and growth dynamics. Generally, risk contribution from unhedged currency exposures could be higher than it used to be in the past. For this reason foreign exchange risk management may be more of a priority than ever. Nowadays companies face the challenge of evaluating the potential loss of transactions, especially in light of the recent financial crisis that showed what can happen as a result of poor risk management policy. Value -at-Risk (VaR) holds a special place in the risk management--it is used almost everywhere. VaR is particularly important because it is used to calculate the market risk component of regulatory capital under the Basel Committee and it is one of the most applied risk measure in investment portfolio theory, financial control and financial reporting as well. In this paper we have applied VaR methods for non-financial companies' foreign exchange exposure measurement. As a misleading VaR estimate can lead to bad judgement on foreign exchange exposure and, consequently, to bad risk management, there is a need for an examination of VaR applications in the context of Baltic non-financial companies. The measure of foreign exchange exposure lies in the variety of difficulties. First of all, there is no single unambiguous method of risk assessment, as different methods may produce different results. Secondly, each method has its own faults. The object of this research is foreign exchange risk measurement and management for the Baltic States companies. The purpose of this research is by analysing different issues relating to the measurement and management of foreign exchange exposure to propose Baltic companies better ways to manage their outstanding currency positions. To achieve the purpose the following tasks were conducted: 1. Analysis of the theoretical aspects of the measuring and managing currency exposure. 2. Analysis of Baltic companies' financial reports data to clarify risk management activities. 3. Clarifying firms' attitudes towards foreign exchange risk management in the Baltic States. 4. Estimating different VaR methods to measure foreign exchange exposure. 5. Development of recommendation how Baltic companies should manage their outstanding currency positions. The research methodology used in this paper is generally accepted qualitative and quantitative methods of economic research, including Value-at-Risk (VaR) methods to measure risks for different horizons and by testing different observation periods of open positions. The paper starts with a literature review in order to highlight the difficulties faced by non-financial companies in identifying, measuring and managing foreign exchange risk. The analysis conducted in this paper is based on companies' financial reports' data and statistics, and certain empirical studies. The data set is based on firms that were publicly listed on NASDAQ OMX Baltic Stock Exchange lists. Baltic Regulated market is the primary market of the NASDAQ OMX Baltic exchanges, which is regulated under EU directives and is under the supervision of the national FSA. The listing requirements are based on European standards and EU directives, and intended for companies that are well established. …

Variability of Foreign Exchange Exposure and its Relations to Firm Value

Variability of Foreign Exchange Exposure and its Relations to Firm Value

Show Me Your Competitors and I Will Tell You If You are Exposed: Market Structure and Foreign Exchange Exposure

We examine the impact of exchange rates on profits and prices in differentiated consumable goods markets under imperfect competition. We model the exchange rate exposure of exporting firms operating within price and quantity settings where between and within competition co-exist. We show that these two forms of competition may act as opposing forces in terms of the impact of the exchange rate on the optimal prices (quantities) and profits in both settings. Empirical tests of real and bilateral exchange rate exposure using stock price and profit data from twenty-two multinational firms, confirm the existence of a link between the ability of a firm to pass on the exchange rate changes to its customers and the magnitude of the exposure on the rival firms operating in the same market.

Foreign Exchange Exposure Management Practices by Zimbabwe's Tourism and Hospitality Companies: A Case for the Depreciation of Rand (2014-2016)

One of the key challenges for tourism and hospitality in the Sub-Sahara Africa (SSA) region is currency behaviours and Exchange rate regime choices. When a company engages in international business foreign currency risk management becomes a crucial part of doing business and the tourism industry of Zimbabwe was not spared on this issue. The objective of this research was to assess the foreign exchange (forex) Exposure Management Practices by Zimbabwe's tourism and hospitality companies. The study was done through a survey on 28 operators in Zimbabwe. A qualitative research approach was adopted in analysis of the data It was found out that the most commonly used ways of reducing the exposure by Zimbabwe's tourism companies were the amicable and mixed-method approaches, of receiving the currency and use it in the country of origin to import materials, matching receipts and payments in foreign currency, risk shifting though it come with low volumes and compromised repeat business. The study recommended that companies and the entire economy must consider invoicing products and services in Rands and even use the rand as a reporting currency. If for example tourism and hospitality players would price regional tourists especially from South Africa and other Rand countries, ignoring the impact of rand depreciation, it would mean that Zimbabwe's tourism and hospitality providers will be in direct competition with the former's own local service providers based on rand priced packages.

Challenges Posed by Foreign Exchange Exposures and Strategic Way-Out

Foreign exchange rates determine exporting firms' profitability, competitiveness and also give comparative advantage to a country. The fluctuating exchange rates pose unique risks and opportunities for Indian companies with global supply chains and those operating in many geographic markets. This paper addresses exchange rate exposure in terms of transaction risk, translation risk and economic risk and analyses risk management strategies of the firms through hedging and Rupee invoicing. This paper suggests rupee invoicing when the exporters has first-mover advantage and power through product differentiation as well as the stable monetary policy and low transaction costs associated with home

Derivatives Usage in Emerging Markets Following the GFC: Evidence from the GCC Countries

ABSTRACTIn this article, we avail of International Accounting Standards IFRS 7 to investigate the usage and motivation of hedging by firms in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). The results of our panel and cross-sectional data logistic regressions indicate a focus on foreign exchange exposure, interest rates risk, and commodity risk in this region. We find that the use of hedging instruments in this region is also influenced positively by the firm’s size and, to a lesser degree, positively by the firm’s gearing ratio and negatively by its propensity to growth. The level of activity, nevertheless, remains lower than is the case for firms globally.

The effects of fair value reporting on corporate foreign exchange exposures

We analyze the effects of fair value reporting standards (FVR) SFAS 133 and IAS 39 on foreign exchange (FX) exposures of U.S. multinational firms. We observe reductions in FX exposures to developed market currencies that coincide with the implementation of FVR. Risk reductions mainly affect U.S. multinational firms and to a much lesser extent matched control groups of domestic firms. For firms with exposures to emerging market currencies, we observe no changes in positive FX exposures but substantial shifts in negative exposures resulting in a change of exposure direction. Additionally we report changes in FX exposure asymmetry affecting multinational and domestic firms. Observed results are robust to several alternative model specifications and are unlikely explained by the launch of the euro, changes in firm-level FX exposure determinants, the rise and decline of technology shocks, shifts in systematic risk factors, or the Asian Financial Crisis.

Executive pensions, risk-shifting, and foreign exchange exposure

Using a hand-collected executive compensation database of 272 large U.S. firms from 2000 to 2009, we present the first study of its kind to analyze the effects of executive pension-based compensation on foreign exchange exposure. We find evidence that higher executive pension compensation results in lower foreign exchange exposure among our sample firms, an effect that is strongest when sample firms are closest to bankruptcy. Our results have important implications for the structuring of managerial compensation contracts for multinational firms.

Exchange rate exposure and risk management: The case of Japanese exporting firms

This paper investigates the relationship between Japanese firms’ exposure to the exchange rate risk and their risk management. Following Dominguez (1998) and others, we first estimate the firms’ exposure to the exchange rate risk by regressing their stock prices on the exchange rate and the market portfolio. We next investigate possible influences of various risk management measures on the firms’ foreign exchange exposure. Risk management variables include financial and operational hedging, the invoice currency choice, and the price revision strategy (pass-through) of 227 listed firms in 2009, which were collected from a questionnaire survey of Japanese firms listed in the Tokyo Stock Exchange. Our main findings are as follows: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure, judged by the market. Second, the higher the US dollar invoicing share, the greater the foreign exchange exposure is, which can be reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use a combination of risk management tools to mitigate the degree of exchange rate risk.

A Literature Review on the Quantification of Foreign Exchange Exposure of Non-Financial Firms Using Capital Market Approach

Since the transitions from fixed to floating exchange rates after the breakdown of the Bretton Woods system in 1973, companies have become increasingly exposed to foreign exchange rate risk. The importance of foreign exchange risk has long been emphasized in the financial risk management literature. This study is a literature review focusing on the foreign exchange rate exposure that is the impact of foreign exchange risk on companies’ assets and liabilities. Firstly, the study tried to clarify the concept of the foreign exchange exposure and then the different models in the context of capital markets approach on the measurement of the foreign exchange rate exposure was examined in detail. Secondly, determinants of foreign exchange exposure were overviewed in general. Thirdly, the relationship between foreign exchange risk management and foreign exchange exposure is summarized. The research was made to cover the basic theoretical and empirical studies in this area. We examine the empirical literature on advanced and developing economies in particular. This paper provides a comparative outlook to researchers, who are interested in related subjects in financial risk management.

Foreign Exchange Exposure and Hedging of Turkish Companies: Panel Data Evidence

<p>This study investigates the foreign exchange exposure and determinants of risk for different time horizons of Turkish companies from 1997 to 2011. In order to analyze the effect of the 2001 crisis, the study is split into two sub-periods: pre-crisis, and post-crisis. The empirical findings of the study suggest a negative relationship between exposure and asset turnover ratio, and profit margin, while there was a positive relationship between exposure and leverage. The study also provides empirical support for the fact that the companies with a higher export rate are exposed to higher risk. Finally, large companies are subject to less risk in the short run.</p>

The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya

Despite the growth in the Kenyan banking sector, market risk still remains a major challenge. The objective of study was to assess the effect of market risk on financial performance of commercial banks in Kenya. The study covered the period between year 2005 and 2014. Market risk was measured by degree of financial leverage, interest rate risk and foreign exchange exposure while financial performance was measured by return on equity. The study used the balance sheets components and financial ratios for 43 registered commercial banks in Kenya. Panel data techniques of random effects, fixed effects estimation and generalized method of moments (GMM) were used to purge time–invariant unobserved firm specific effects and to mitigate potential endogeneity problems. The pairwise correlations between the variables were carried out. F- test was used to determine the significance of the regression while the coefficient of determination, within and between R², were used to determine how much variation in dependent variable is explained by independent variables. From the results financial leverage, interest rate and foreign exchange exposure have negative and significant relationship with bank profitability. Based on the study findings, it is recommended that commercial banks especially locally owned are required to consider finding ways of mitigating the market risks by use of financial instruments such as financial derivatives and be active in derivatives markets. These may reduce their interest rate risk and foreign currency risk exposure. The commercial banks are also required to monitor the financial leverage so as to reduce the financial risk.

The 2016 EU-wide bank stress test: an analysis of the main methodological novelties

This note focuses on the elements of novelty that characterise the 2016 stress test, based on the methodological notes released by the European Banking Authority, and discusses in closer detail the following key aspects: the request for specific forecasts concerning 'conduct risk'; the greater attention towards risks originated by foreign exchange exposures; the lack of a 'pass/fail' threshold that partitions tested banks into 'safe' and 'unsafe' ones; and the change in the sample size of banks required to take the test.