Foreign Exchange Risk Exposure Research Articles

Hedge Accounting Disclosures and Sustainable Growth of Listed Deposit Money Banks in Nigeria

The primary problem facing listed deposit money banks in Nigeria is their struggle to achieve sustainable growth in a volatile economic environment. This study investigated the impact of hedge accounting disclosures on the sustainable growth of these banks, focusing on commodity hedge disclosure, interest rate hedge disclosure, and foreign exchange rate disclosure, while controlling for market capitalization. Using an ex post facto research design, the study analyzed secondary data from 11 selected banks over a period of 10 years from 2014 to 2023. The method of data analysis was random effect regression technique. The findings revealed that commodity hedge disclosure (COMD) and interest rate hedge disclosure (INTD) have significant positive effects on the sustainable growth rates of listed deposit money banks in Nigeria. Conversely, foreign exchange rate disclosure (FEXD) has a significant negative effect on sustainable growth, indicating that high levels of foreign exchange risk exposure, when disclosed, may reduce investor confidence and perceived stability. The study concluded that hedge accounting disclosures significantly impact sustainable growth of listed deposit money banks in Nigeria. It recommended the management of listed deposit money banks in Nigeria should enhance commodity and interest rate hedge disclosures to improve the quality of foreign exchange risk communication.

人民币汇率变动与上市公司外汇风险暴露——基于双变量GJR-GARCH模型的实证分析

人民币汇率变动与上市公司外汇风险暴露——基于双变量GJR-GARCH模型的实证分析

The Impact of RMB Exchange Rate Fluctuation on China's Air Conditioning Industry

Based on the background of China's current trade with other countries is becoming increasingly close, the study of exchange rate stability on the impact of China's trade with other countries to promote China's economic stability has a certain theoretical significance. In the study of air conditioning industry import and export trade factors affecting the attention of the national exchange rate is very important, in the two countries trade relations, the exchange rate is a measure of the two countries to buy, sell the price of the product of the vital factors, exchange rate changes for the enterprise will bring a certain degree of impact, stabilization of the exchange rate for the promotion of our country and the trade of other countries in the long term and good cooperation has important practical significance. The air-conditioning manufacturing industry is a very representative research object. The cost-sensitive home appliance industry is a labor-intensive industry, which provides a huge number of jobs for China and creates a huge amount of foreign exchange income. At the same time, the home appliance industry, as a representative of China's manufacturing industry, faces industrial upgrading pressure and is in the maturity of a fully competitive industry, which has been severely impacted by exchange rate changes. It is of great significance to correctly measure and analyze the foreign exchange risk exposure of the import and export of the air-conditioning industry and its influencing factors. From a micro point of view, enterprises can be based on foreign exchange risk exposure situation targeted adjustment of financial strategies, strategies and management methods. From a macro point of view, the country can be based on the overall foreign exchange risk exposure characteristics of home appliances to formulate the correct macroeconomic policy.

Mitigating foreign exchange risk exposure with supply chain flexibility: A real option analysis

AbstractUncertainty and risk abound in supply chains. One such form of risk existing in global supply chains comes from volatility associated with currency fluctuations—Foreign Exchange (FX) risk. Although the study and practice of using financial hedging instruments are well documented, there are also emerging supply chain strategies firms may adopt for mitigating FX risk. The purpose of this multi‐method study is to investigate how supply chain professionals perceive and mitigate FX risk, as well as to measure how investing in supply chain flexibility strategies affect firm financial performance. Using a mixed‐method approach based on qualitative case studies and simulation experiments using the lens of Real Option Theory, we are able to show how investments in supply chain flexibility strategies can mitigate FX risk in terms of cash flows and profits. Theoretical, methodological, and managerial implications are provided for better understanding FX risk in the emerging supply chain finance discipline.

Evaluation of efficiency of hedging strategies with option portfolios for buyers of the currency US dollar/Colombian peso

This paper evaluates the efficiency to mitigate the exchange rate risk of nine hedging strategies with financial options. Strategies to hedging the purchase of US dollar Colombian peso (USDCOP) by importers in Colombia were raised. In this way, the traditional strategy with call options and eight strategies with investment portfolios were evaluated. These portfolios of options for hedge are offered by financial entities in Colombia. These nine hedged scenarios were compared with the unhedged scenario that corresponds to the foreign exchange risk exposure of importers. The USDCOP currencies were modeled with a mean reversion with jumps models, option premiums were valued with the black-scholes method and the best hedging strategy was determined through a Monte Carlo simulation. According to the results obtained, the nine hedging strategies manage to mitigate risk, but the most efficient was the option portfolio called collar.

Financial Risks and Its Effect on Financial Performance of Investment Firms Listed at the Nairobi Securities Exchange in Kenya

The study investigated financial risks and its effect on the financial performance of investment firms listed at NSE. The study was guided by three research objectives; to determine the influence of foreign exchange risk, liquidity risk, and interest rate risks on the financial performance of investment firms listed at the NSE. The study used secondary data for the period, 2011-2018. The study employed a descriptive research design. The target population was the four investment companies listed on the NSE. Secondary data was collected from the financial annual reports of the firms. Statistical Packages for Social Sciences (SPSS) version 20.0 was used for data analysis. Descriptive statistics, regression analysis, and diagnostic tests were employed. The study concludes that a decrease in liquidity risk results to increased financial performance. A decrease in foreign exchange risk exposure could lead to improved financial performance. The study concludes that interest rate risk was negatively and significantly related to financial performance. Further, the study concludes that firm size had a positive and significant relationship with financial performance. The study recommends that the listed investment firms should increase the current ratio to minimize exposure to financial risks and the firms should also ensure they invest the idle cash to diversify investment portfolio. The study recommends that the management of investment firms should introduce a robust efficient and effective strategies that can assess, identify, and manage foreign exchange risks. Investment firms can also use various financial derivatives to reduce the effect of exchange rate risk. The study recommends that the firms can explore means they can use to improve capacities to manage interest rate risks exposure. For instance, interest rate risks can be mitigated by using financial derivatives and also through securitization of assets to minimize interest rate risks. Keywords: Financial Risks, Financial Performance, Liquidity Risk, Interest Rate Risks, Foreign Exchange Risk.

Research on Reducing Foreign Exchange Risks by Foreign Exchange Derivatives -- Taking China Foreign Trade Companies as an Example

<p>With the deepening of international trade, the foreign exchange risk exposure of foreign trade companies is gradually being valued in the international market, and foreign exchange risks are also the main risks that Chinese foreign trade companies need to avoid. This article analyzes the reduction of foreign exchange risks from both the internal and external aspects of the company, focusing on the value-preserving role of foreign exchange derivatives in transactions, and making suggestions for the steady operation of foreign trade companies.</p><p> </p>

Effect of operational and market risk exposures on financial performance of DT-Saccos in Kenya

The main aim of the investigation was to analyze the effect of operational and market risk exposures on the financial performance of DT-SACCOs in Kenya. The specific objectives of the study were to; assess the effect of operating expense risk exposure on the financial performance of DT-SACCOs in Kenya; To establish the effect of operation efficiency risk exposure on the financial performance of DT-SACCOs in Kenya; Effect of interest rate risk exposure on the financial performance of DT-SACCOs in Kenya; Effect of foreign exchange rate risk exposure on the financial performance of DT-SACCOs in Kenya. Effect of operational and market risk exposure on the financial performance of DT-SACCOs in Kenya. The study used panel data between the years 2010-2019 which was 10 years period. The results revealed that at both bivariate and multivariate regression operating expense risk, operating efficiency and foreign exchange risk exposure had a significant effect on the financial performance of DT-SACCOs in Kenya. Only interest rate risk exposure did not have a significant effect on the financial performance of DT-SACCOs in Kenya.

Do Risk Disclosures Matter When It Counts? Evidence from the Swiss Franc Shock

ABSTRACTWe examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015, the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro‐Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid‐ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell‐side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor‐relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.

Emerging market currency risk exposure: evidence from South Africa

PurposeThe purpose of this paper is to examine the level of foreign exchange exposure of listed nonfinancial firms in South Africa. The study spans the period January 2002 and November 2015. Foreign exchange risk exposure is estimated in relation to the exchange rate of the South African Rand relative to the US$, the Euro, the British Pound and the trade-weighted exchange rate index.Design/methodology/approachThe study is based on the augmented-market model of Jorion (1990). The Jorion (1990) is a capital asset pricing model-inspired framework which models share returns as a function of the return on the market index and changes in the exchange rate factor. The market risk factor is meant to discount the effect of macroeconomic factors on share returns, thus isolating the foreign exchange risk factor. In addition, the study further added the size, value, momentum, investment and profitability risk factors in line with the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model to account for the fact that equity capital markets in countries such as South Africa are known to be partially segmented.FindingsForeign exchange risk exposure levels were estimated at more than 40% for all the proxy currencies on the basis of the standard augmented market model. However, after controlling for idiosyncratic factors, through the application of the Fama–French three-factor model, the Carhart four-factor model and the Fama–French five-factor model, exposure levels were found to range between 6.5 and 12%.Research limitations/implicationsThese results indicate the importance of controlling for the effects of idiosyncratic facto0rs in the estimation of foreign exchange risk exposure in the context of emerging markets of Sub-Saharan Africa (SSA).Originality/valueThis is the first study to apply the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model in the estimation of foreign exchange exposure of nonfinancial firms in the context of a SSA country. These results indicate the importance of controlling for the effects of idiosyncratic factors in the estimation of foreign exchange risk exposure in the context of emerging markets.

The optimal multi-period hedging model of currency futures and options with exponential utility

In this paper, we consider the optimal cross-hedging and risk control problem of a competitive firm facing exchange risk exposure in a multi-period setting. We present the optimal positions of currency futures and options to maximize the exponential utility of the terminal wealth by dynamic programming approach. To evaluate the potential effectiveness of cross-hedging with currency futures and options, we compare terminal wealth, utility based on terminal wealth and variance of the wealth accumulation path in three cases: hedging with futures and options, net futures hedging and no hedging. An empirical study of two cross-exchange rates of USD/EUR and CNY/USD is performed. The results show that cross-exchange rate futures and options always offer the firm an improved ability to hedge against the foreign exchange rate risks. Relative to no hedging, cross-hedging with currency futures and options or net currency futures hedging achieves positive returns. As the risk aversion coefficient increases, the firm’s profit of futures hedging increases, while the profit of options hedging decreases. We suggest the firm with smaller risk aversion coefficient choose options hedging, and the firm with higher risk aversion coefficient choose futures hedging. Furthermore, when using currency derivatives for hedging, the wealth volatility also decreases significantly. Thus, for the multinational firms, cross-currency hedging is an efficient risk management technique to reduce their foreign exchange risk exposure.

Effect of Foreign Equity Gross Purchases on Stock Market Volatility in Kenya : Empirical Evidence from Nairobi Securities Exchange

The main objective of the study was to determine the effect of foreign equity purchases turn-over on the level of volatility at the Nairobi Securities Exchange. The study was twofold as it focused on the effect of foreign equity gross purchases on stock market volatility before and after introducing foreign exchange rate as a moderating variable. The span of the study was eight years from 2008 to 2015 as the period was marked by unprecedented world events such as the global economic recession and the post poll pandemonium in Kenya which subsequently affected foreign equity flows and the volatility in the equity bourse. The research design employed in the study was the causal research design. The target population of the study were the monthly foreign equity gross purchases, monthly Nairobi Securities Exchange 20 share indices and monthly USD Bid-Ask foreign exchange. The study samples in the study were the monthly foreign equity gross purchases, monthly Nairobi Securities Exchange 20 share indices and monthly USD Bid-Ask foreign exchange from May 2008 to December, 2015. Time series secondary data was used in the study. The data was subjected to diagnostic tests such as linearity test, multicollinearity test, normality test, test for homoscedasticity and test for autocorrelation with E-views being the main statistical tool of analysis. The main model used in the study was the vector error correction model subsequent to undertaking stationarity test, lag selection test and cointegration tests. Study results reveal a positive but in-significant effect of foreign equity purchases turn-over on stock market volatility and a negative but in-significant effect after introducing foreign exchange rate as a moderating variable. The study recommends adoption of efficacious cross-border listing rules to spur stock market integration that would subsequently increase foreign investor participation and development of apt financial derivative markets to aid in the mitigation of time-varying foreign currency risks as a consequence of foreign exchange risk exposure.

Managing Interest and Exchange Rate Risks

Company directors have a legal and moral responsibility to preserve the corporate entity. They must not take unnecessary risks leading to financial distress. Excessive borrowing and foreign exchange exposure entail such risk. The most obvious risk is inability to make loan payments when due. In this chapter, however, we shall be concerned with managing the narrower risks associated with changing rates of interest and with changing foreign exchange rates. Companies can hedge risks using various options, forwards, futures, and swap transactions. Hedging is about matching assets and liabilities in a manner that makes the matched combination immune to a source of risk. If a company has cash flows, assets, and liabilities denominated in foreign currencies, exposure to unexpected changes in exchange rates can constitute significant risk for the company. Therefore, the Board cannot leave it to shareholders to hedge the company’s foreign exchange risk exposure within the context of their own portfolios. Shareholders cannot protect the corporate entity or its creditworthiness in this way. Furthermore, a company cannot keep its shareholders sufficiently informed about the company’s current risk exposures for them to hedge their own portfolios effectively. Consequently, it falls to the Corporate Treasurer to hedge at least those risks that plausibly could lead to financial distress.

Residual foreign exchange risk: does CEO compensation matter?

PurposeThe purpose of this paper is to investigate whether CEO compensation scheme may induce some agency conflicts in the foreign exchange risk hedging policy.Design/methodology/approachResidual exposure is a post-hedging variable computed as the ratio of unrealized foreign exchange risk gains/losses to international sales. The authors follow the optimal hedging theory developed by Smith and Stulz (1985). The residual foreign exchange risk exposure is a way to capture some consequences of the managerial risk aversion, whereas the compensation scheme granted to CEO reveals that of the shareholders. The authors interpret any deviation to the predictions of this theory as a mark that some agency conflicts exist.FindingsCEO compensation (stock-options, shares and so) significantly influence the level of the residual foreign exchange risk exposure. Both in-the-money exercisable options and shares are negatively related to the residual exposure of foreign exchange risk. The authors also document that the effect of agency problems is rather contingent because shares and options have especially a negative impact when the level of foreign exchange risk is relatively high.Originality/valueThe residual FX risk exposure variable the authors promote in this paper completes the traditional proxies used to depict the corporate hedging policy such as the nominal or total fair value of currency derivatives (Davies et al., 2006), use of nominal values (Spanò, 2007), use of fair values of derivatives and the fraction of production hedged (Wang and Fan, 2011). The information that it conveys differs significantly from the one provided by traditional proxies because it captures the year-end post hedging firm’s risk profile.

The additional cost of hedging in foreign currency loans

Foreign currency denominated loans ( FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that domestic borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics, and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lender’s perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations. JEL Classification: G21, G32

Do Risk Disclosures Matter When it Counts? Evidence from the Swiss Franc Shock

We examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015, the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro‐Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid‐ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell‐side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor‐relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.

ANÁLISIS DE LA EXPOSICIÓN ECONÓMICA AL RIESGO CAMBIARIO EN EL MERCADO ESPAÑOL

Este trabajo analiza el nivel de exposición económica al tipo de cambio y sus determinantes en el mercado español, considerando seis divisas de referencia respecto al euro: el dólar estadounidense, el yuan chino, el franco suizo, la libra esterlina, la corona noruega y el rublo ruso. Ello es relevante porque la volatilidad cambiaria puede tener un impacto directo sobre las operaciones de la empresa en el corto plazo y, en un horizonte temporal mayor, sobre su valor. Los resultados obtenidos en esta investigación confirman que la mayoría de empresas analizadas tienen un perfil exportador en su exposición económica, esto es, se benefician de depreciaciones del euro frente a otras divisas, especialmente, la libra esterlina. Por el contrario, respecto al franco suizo, predominan los importadores netos. Asimismo, sus determinantes difieren entre exportadores e importadores, si bien, en ambos casos, la diversificación geográfica actúa como cobertura operativa.

Foreign exchange transaction exposure of enterprises in Serbia

Enterprises involved in international business face transaction exposure to foreign exchange risk. This type of exposure occurs when an enterprise trades, borrows, or l?nds in foreign currency. Transaction exposure has a direct effect on an enterprise?s financial position and profitability. It is one of the three forms of exposure to exchange rate fluctuations, the other two being translation exposure and operating exposure. The aim of this paper is to assess the transaction exposure of enterprises in Serbia operating internationally. In addition to identifying and measuring transaction exposure, this paper explores the practical importance that enterprises in Serbia attach to management of this type of foreign exchange risk. We do not find significant differences between domestic and foreign enterprises in their choice of the type of foreign exchange risk exposure to manage. Although transaction exposure is the most managed type of foreign exchange risk, research has shown that, compared to foreign businesses, Serbian enterprises do not use sufficient protective measures to minimize the negative impact of this type of exposure on their cash flows and profitability. We expected that there would be a statistically significant dependence between the volume of enterprises? foreign currency transactions and the level of applied transaction exposure management practices. However, the results of our research, based on a sample of enterprises in Serbia operating internationally, show that transaction exposure management practices can be influenced by factors other than the level of an enterprise?s foreign currency transactions, such as the enterprise?s country of origin.

Hedging Foreign Exchange Risk Exposure by Importer Companies

The study was conducted in order to disclose the Foreign Exchange (FX) rate risk faced by every importer company. The paper investigates FX risk hedging strategy using forwards versus floating strategy in terms of minimizing total importing costs. The study exposes real-life costs of hedging strategies using forwards comprising theoretical foundations as well as practical implementation example based on real company data. The main question to be answered in the paper is whether it is beneficial to hedge with FX forwards or it is better to float FX exposure.

Hedging Foreign Exchange Risk Exposure by Importer Companies

The study was conducted in order to disclose the Foreign Exchange (FX) rate risk faced by every importer company. The paper investigates FX risk hedging strategy using forwards versus floating strategy in terms of minimizing total importing costs. The study exposes real-life costs of hedging strategies using forwards comprising theoretical foundations as well as practical implementation example based on real company data. The main question to be answered in the paper is whether it is beneficial to hedge with FX forwards or it is better to float FX exposure.