Foreign Exchange Risk Research Articles

Mandatory governance reform and corporate risk management

Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.

Is Foreign Exchange Risk Priced in Bank Loan Spreads?

This study investigates the effects of foreign exchange (FX) exposure on bank loan spreads. Private bank loans are a major form of corporate financing in both developing and developed countries. However, the international component of credit risk in bank loan pricing has been largely ignored. Controlling for firm- and loan-level characteristics, our results show that firm-level FX exposure is positively related to loan spreads. The results imply that, if other loan and firm characteristics remain constant, syndicated loan lenders view FX exposure as an additional risk factor that can impede future loan repayments. As a result, lenders price borrowing firms’ FX exposure, driven by cash flow volatility and foreign operation. The results are robust to different measures of FX exposure, firm fixed effects, cash flow volatility, and controlling for other confounding factors. Our findings are consistent with those of prior international finance studies that document a positive relation between firm-level cash flow volatility and FX exposure and provide important implications for MNCs and policymakers involved with cross-country operations.

Currency momentum strategies based on the Chinese Yuan: Timing of foreign exchange volatility

This study provides an empirical investigation of currency momentum strategies traded on the Chinese Yuan (RMB). Using a cross trading strategy, we find that the RMB-based currency momentum (RCMOM) strategies are profitable and yield excess returns of up to 5% per annum (p.a.). The results are robust to risk adjustment and sub-periods analysis. We further calculate the foreign exchange volatility to explain the profits of RCMOM strategies. Our evidence shows that increased foreign exchange volatility is associated with higher RCMOM profits, and the strategies are more profitable with high volatility of the Chinese stock market. Considering the influence of Chinese market states in foreign exchange volatility, the RCMOM returns are insignificant. Our results suggest that the impact of foreign exchange risk is correlated to China’s market states.

Możliwość zwolnienia z opodatkowania dochodów z transakcji zabezpieczających ryzyko walutowe w działalności gospodarczej prowadzonej na podstawie decyzji o wsparciu lub na terenie specjalnej strefy ekonomicznej na podstawie zezwolenia

This article aims to answer the question whether an income arising from financial instruments hedging foreign exchange risk, i.e. the income from forward contracts and currency options, can be considered as an income from an economic activity conducted on the basis of a Special Economic Zone (SEZ) Permit or an economic activity specified in the decision on support. In the Author’s opinion, the income from contracts for the purchase or sale of foreign currencies constitutes the income from tax-exempt activities, provided that transactions were used to hedge foreign exchange risk related to activities specified in the SEZ Permit or the decision on support. This is a tantamount to the possibility of exempting such an income from corporate income tax. The empirical and analytical method was applied for the purpose of the analysis of legal acts regulating the discussed subject. Literature, individual interpretations of tax law, tax explanations, and judgments of administrative courts were used as well.

Foreign Exchange Risk in Public Firms

Foreign Exchange Risk in Public Firms

Stock market uncertainty and uncovered equity parity deviation: Evidence from Asia

Recently, many empirical studies document that a country's stock market performance relative to the US and its local currency units per US dollar tend to move in opposite direction over the short run, also known as the uncovered equity parity (UEP) condition. However, those studies have applied only to advanced economies to date. This study conducted the same tests to a sample of 18 Asian economies. To one's surprise, we found that the UEP condition reverses its sign among Asian currencies. In addition, measures of stock market uncertainty are suggested as a potential driving force behind this UEP reversal for Asian economies. This surprising result suggests that there might be other mechanisms behind the joint dynamics of equity and currency returns than the portfolio rebalancing caused by incomplete foreign exchange risk hedging. The reasoning is that Asian foreign exchange (FX) markets are even more subject to incomplete foreign exchange risk hedging. Thus, one should expect even stronger UEP evidence from Asian currency markets if the portfolio rebalancing mechanism was the only force at play.

ФИНАНСОВЫЕ РИСКИ МИКРОФИНАНСОВЫХ ОРГАНИЗАЦИЙ (ЗАРУБЕЖНЫЙ ОПЫТ)

New ideas make it clear that attempts by the international community to support microfinance institutions and provide them with borrowers do not always take into account the most serious financial risks of lenders. This study examines the exposure of microfinance institutions to liquidity, interest rate and foreign exchange (FX) risks. Analyzing data from financial statements of microfinance institutions, it can be concluded that the microfinance sector faces minimal liquidity risk, high interest rate risk and lower than commonly as-sumed foreign exchange risk. Linking risk exposure to institutional characteristics, the data show that legal status and regional affiliation correlate with risk exposure, but regulatory quality does not. The results indicate that the lender community may not expect great benefits from expanding the array of ongoing measures from credit market regulators to mitigate liquidity or foreign exchange risk.

A Reconsideration of the Failure of Uncovered Interest Parity for the U.S. Dollar

We re-examine the time-series evidence for failures of uncovered interest rate parity on short-term deposits for the U.S. dollar versus major currencies of developed countries at short-, medium- and long-horizons. The evidence that interest rate differentials predict foreign exchange risk premiums is fragile. The relationship between interest rates and excess returns is not stable over time and disappears altogether when nominal interest rates are near the zero-lower bound. However, we do find evidence that year-on-year inflation rate differentials consistently predict excess returns – when the U.S. dollar y.o.y. inflation rate has been relatively high, subsequent returns on U.S. deposits tend to be high. We interpret this evidence as being consistent with hypotheses that posit that markets do not fully react initially to predictable changes in future monetary policy. Interestingly, the predictive power of relative y.o.y. inflation only begins in the mid-1980s when central banks began to target inflation more consistently and continues in the post-ZLB period when interest rates lose their primacy as a policy instrument. However, we caution not to rule out the possibility that excess returns are not predictable at all.

STRATEGI PERBANKAN SYARIAH DALAM MANAJEMEN ASET DAN LIABILITAS

The purpose of this article is for readers to know what Islamic banking strategies are in managing their assets and liabilities. This research is classified as Library Research, while the nature of this research is descriptive qualitative, namely research that seeks to find solutions to existing problems based on data, by presenting, analyzing, and interpreting data. Data analysis techniques that take general things, then conclude to specific things. The results of this study can be concluded that if Islamic banks are able to maximize their benefits from well-managed and structured funding and financing and are able to produce optimal management of the risks faced by Islamic banks, then these Islamic banks can be said to be successful in their asset and liability management strategies. The ALMA strategy used by Islamic banks is Planning, Fund Management and Financing. The ALMA Strategy Quality Management can also minimize risks such as: Financing Risk, Liquidity Risk, Pricing Risk, Foreign Exchange Risk, Contingency Risk, Liquidity Risk, Gap Risk.

Estudio de la gestión del riesgo cambiario en los procesos de importación de los comerciantes del sector de El Hueco de la ciudad de Medellín

Actualmente, vivimos en un mundo cada vez más globalizado. Las tecnologías de la información y las comunicaciones (TIC´s) permiten que las empresas se muevan en un entorno más competitivo y por ello se requiere mejor planificación y alineación de sus metas y objetivos empresariales. Además, los hechos financieros internacionales cada vez afectan más los mercados locales, provocando fluctuaciones inesperadas en los tipos de cambio, variaciones en las tasas de interés o caídas en los índices bursátiles, lo cual tiene una incidencia relevante sobre el desempeño y el valor corporativo. Por esta razón, es indispensable que las empresas conozcan correctamente las herramientas disponibles en el mercado para cubrirse ante los cambios negativos del entorno y, al mismo tiempo, tomar decisiones acertadas de inversión y financiación. Este artículo se enfoca en el análisis de las estrategias de cobertura desarrolladas por los comerciantes del sector de “El Hueco” de Medellín en los procesos de importación. El análisis fue realizado con una muestra correspondiente a 12 comerciantes con mayores volúmenes de compra en el mercado exterior y con mayor trayectoria como importadores, por medio de dos secciones con entrevistas semiestructuradas y el desarrollo de una encuesta. En la primera sección, se logró detallar las principales variables y características como importadores; en la segunda sección se obtuvo información referente a la gestión de todos los riesgos inherentes a sus actividades comerciales. Los derivados financieros significan para estos agentes económicos los instrumentos óptimos para la gestión del riesgo cambiario, los cuales contribuyen a la estabilización de los flujos de efectivos en el rubro costos y se resalta la importancia de dichos instrumentos como generadores de valor corporativo.

A Joint Foreign Currency Risk Management Approach for Sovereign Assets and Liabilities

A sovereign asset and liability management framework for managing foreign currency risk requires a joint analysis of (i) the external financial liabilities resulting from a country’s sovereign debt and (ii) the foreign exchange assets of its central bank. The study recommends a practical approach that includes analysis of the foreign exchange positions of central bank reserves and central government debt portfolios and optimization of the net position. A quantitative method is employed for efficient management of foreign exchange risk. The model is tested for seven countries (Albania, Ghana, North Macedonia, South Africa, the Republic of Korea, Tunisia, and Uruguay).

An Early Warning Signal (EWS) Model for Predicting Financial Crisis in Emerging African Economies

The devastating effects of the global financial crisis (GFC) have led to a renewed, global interest in the development of an early warning signal (EWS) model. The purpose of the EWS model is to alert policymakers and other stakeholders to the possibility of the occurrence of a crisis. This study estimates a EWS model for predicting the financial crisis in four emerging African economies using a multinomial logit model and a data set covering the period of January 1980 to December 2017. The result of the study suggests that emerging African economies are more likely to face financial crisis as debts continue to rise without a corresponding capacity to withstand capital flow reversal as well as excessive foreign exchange risk due to currency exposure. The result further indicates that rising debt exposure raises the likelihood of the economies remaining in a state of crisis. This result confirms the significance of a financial stability framework that addresses the issues confronting Africa’s emerging economies such as rising debt profile, liquidity and currency risk exposure.

Exchange Rates and Liquidity Risk

I use Forex trading data to study how risks associated with the lack of liquidity contribute to the dynamics of 17 spot exchange rates through their time-varying contributions to risk premia. I find that liquidity risk matters. All the foreign exchange risk premia compensate investors for exposure to liquidity risk; and, for many currencies, exposure to liquidity risk appears to be more important than exposure to the traditional carry and momentum risk factors. I also find that variations in the price of liquidity risk make economically important contributions to the behavior of individual foreign currency returns: they account for approximately 34%, on average, of the variability in currency returns compared to the contribution of approximately 8% from the prices of carry and momentum risk.

INFORMATION FLOW BETWEEN THE US DOLLAR-RUPIAH EXCHANGE RATES

This study investigates the information flow between non-deliverable forward (NDF), spot, and forward US dollar–rupiah exchange rates during the post-Quantitative Easing (QE) period. Our results show a unidirectional information flow from NDF to the spot and forward rates in the post-QE period. We also find that the Indonesian government securities (IGS) played a vital role during the QE period, while international reserves preceded the US dollar–rupiah spot, forward, and NDF exchange rates post-QE. Hence, international reserves became an important policy variable in managing the currency value. Our finding redefines the role of IGS as a policy tool. As a policy suggestion, the Bank Indonesia should maintain a sufficient amount of foreign reserves to mitigate foreign exchange risks of the rupiah.

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.

Impact of financial risk on supply chains: a manufacturer-supplier relational perspective

This study aims to analyse the manufacturer-supplier relational perspective under the influence of exogenous financial risk. Following corporate finance theory, a multi-objective decision model for supplier selection and order allocation is developed to maximise the total profit of the manufacturer, and minimise the implicit equity stake and financial risk faced by selected suppliers. A two-echelon supply chain is explored under the influence of foreign exchange risk, default risk, market risk and price fluctuation risk, and solved using an NSGA-III algorithm. Three case scenarios are analysed to explore the influence of a set of financial risk on the manufacturer-supplier relationship and the behaviour of suppliers concerning risk profile, both in the short and long-term horizon. The results are analysed from both the manufacturer as well as supplier perspective, and the optimal conditions are discussed under the cascading risk circumstances. The study provides multiple insights into the impact of financial risk on supply chain relationship and will be valuable for dealing with similar uncertain economic environment. The research is likely to be of benefit beyond supply chain managers, like investors and financial risk managers in making informed decisions. The need to focus on systemic risk in supply chains is evident from the study.

Foreign Currency Borrowing of Corporations as Carry Trades: Evidence from India

We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms issue more foreign currency debt when the interest rate differential between India and the United States is higher. This "carry trade" relationship breaks down once regulators institute more stringent interest rate caps on borrowing; riskier borrowers cut issuance the most. Stock price exposure of issuers to currency risk rises after issuance, a source of vulnerability during the "taper tantrum" episode of 2013, which macroprudential controls subsequently nullified, as confirmed during the COVID-19 outbreak.

Exchange Rates and Liquidity Risk

I use Forex trading data to study how risks associated with the lack of liquidity contribute to the dynamics of 17 spot exchange rates through their time-varying contributions to risk premia. I find that liquidity risk matters. All the foreign exchange risk premia compensate investors for exposure to liquidity risk; and, for many currencies, exposure to liquidity risk appears to be more important than exposure to the traditional carry and momentum risk factors. I also find that variations in the price of liquidity risk make economically important contributions to the behavior of individual foreign currency returns: they account for approximately 34 percent, on average, of the variability in currency returns compared to the contribution of approximately 8 percent from the prices of carry and momentum risk.

Multinational Companies’ Hedging Effectiveness of Foreign Exchange Risk: A Quantitative Comparison Study

To investigate hedging effectiveness of multinational companies in respect of using currency derivatives, the author adapts an innovative and multi layers GJR-GARCH-based model. This model broke down the currency risk faced by MNCs in each business area and added six control variables other than foreign sales ratio, all these variables have been proved to be related to MNCs’ currency risk exposure but was not included into previous models. Moreover, this model absorbs advantages of several models built in previous studies and combines them into a whole, intact model. This paper also employed a wide research scope, using a sample of 48 non-financial and 28 financial firms headquartered in USA. Also, comparison between financial and non-financial firms is an innovation of our research. According to the result, hedging of non-financial companies in respect of currency risk is ineffective, and financial companies are more likely using currency derivatives to speculate.

The 2020 Pandemic: Economic repercussions and policy responses

This paper analyses the economic and financial repercussions of the 2020 COVID‐19 pandemic. It argues that the pandemic has inflicted serious injuries to the labor force but has not damaged the physical capital stock. Therefore, the resolution policies of this crisis ought to be carefully tailored to supporting structural adjustments to the labor market. The analysis asserts that the impact of the pandemic crisis is exacerbated by the identification gap between the unobserved and the officially reported cases of COVID‐19. The gap increases financial risks, including market‐, credit‐, default‐, and foreign exchange risks.