Exchange Rate Risk Management Research Articles

International use of the renminbi for invoice currency and exchange risk management: Evidence from the Japanese firm-level data

The use of the Chinese renminbi (RMB) is said to have been increasing in recent years for trade invoicing, due to active promotion policies implemented by the Chinese government. However, only patchy information has been presented in the literature on the use of RMB in Chinese trade. Using the information obtained from two-round, large-scale questionnaire surveys, this paper presents new evidence on the use of RMB and exchange risk management by Japanese subsidiaries operating in China and other Asian countries. We find that Japanese subsidiaries in China mainly use the U.S. dollar, and to a lesser extent, the yen in trade with other countries. However, they increase the use of RMB in intra-firm trade with Japan. The result of Logit estimation indicates that RMB transactions will grow further if overseas subsidiaries have more discretion in exchange rate risk management. Removing capital controls on onshore RMB (CNY) market is another necessary condition to promote RMB internationalization.

Uluslararası Muhasebe Standartları Kapsamında Kur Riski Yönetim Faaliyetlerinin Muhasebeleştirilmesi

Today, companies operating in the country's economies, which have become the only market, especially with the influence of globalization, face serious exchange rate risk. This risk can has negative effects on the results of operations of the enterprises. Many different day-to-day exchange rate risk management techniques are emerging in order to reduce or minimize these effects. However, the implementation of these methods brings with it a number of difficulties. Within the scope of International Accounting and Financial Reporting Standards (IAS / IFRS), which is mandatory for many companies as of 2005, it is aimed to give theoretical information about the forward contracts used in the foreign exchange risk management activities and the accounting process and to examine the implementation period. In this context, the theoretical information about the emergence, management and management instruments of the foreign exchange risk was given as the priority and the different alternatives of the risk management activities in the scope of IAS / IFRS have been presented afterwards. Finally, the risk management process belonging to a company operating in Turkey and the applications of the financial transactions included in this process within the scope of financial risk protection accounting.

The Performance of Korean Manufacturing Firms’ Exchange Rate Risk Management

The Performance of Korean Manufacturing Firms’ Exchange Rate Risk Management

The Application of VaR Model in the Interest Rate and Exchange Rate Risk Management of Enterprises Overseas Investment

The internationalization of enterprises has been accelerated constantly in China in recent years. However, the instability of international financial markets forms serious challenge to enterprise risk management of interest rate and exchange rate. In the paper, the interest rate and exchange rate risks faced by enterprise in overseas investment are analyzed. The feasibility of applying VaR method in the enterprise overseas investment interest rate and exchange rate risk management is proposed. In addition, the historical simulation method and Monte Carlo method are adopted for empirical research on interest rate risk in enterprise overseas investment on the basis of VaR model. Finally, related suggestions of strengthening interest rate and exchange rate risk management in enterprise overseas investment are proposed.

Ryzyko kursowe jako przeszkoda w działalności eksportowej. Wnioski z Polski

The focus of the paper is on identifying major factors that can determine the vulnerability of Polish manufacturing companies to exchange rate risk. In order to verify our hypotheses, we have estimated logistic regression models based on a unique database to assess internal and external factors that make companies vulnerable to exchange rate risk. Our observations confirm the importance of exchange rate variability as one of the obstacles to starting and conducting export activity as well as expanding it to new markets. We have found that exchange rate risk is particularly severe for companies that are financially constrained and get financing abroad as well as those whose balance sheets are negatively affected by devaluation. Also vulnerable are innovative firms and those that rely more on input imports. Exchange rate volatility appears to be less of a concern for foreign-owned companies and enterprises that have higher shares of euro-denominated receivables and invoice exports in the Polish zloty. Companies competing by means of product quality and distribution channels are also among those less vulnerable to exchange rate risk. Generally, we have confirmed the problem of exchange rate risk as an important cost to export activity. This gives some implications for exchange rate risk management at both the macroeconomic and microeconomic levels as well as for monetary integration.

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.

Döviz Kuru Riski Yönetimi: Türkiye Tütün Endüstrisi Örneği (Exchange Rate Risk Management: The Case Of Turkish Tobacco Industry)

The exchange rate movements, along with globalization, have become more important not only for financial institutions but also for real sector companies. Also exchange rate risk is important for non-financial companies regards to both assets and liabilities. Management of this exchange rate risk exposure has an impact on competitiveness of these companies. 1 Calismada yer alan gorus ve degerlendirmeler Tutun ve Alkol Piyasasi Duzenleme Kurumunun goruslerini yansitmaz. M. Doganay 8/1 (2016) 518-537 Isletme Arastirmalari Dergisi Journal of Business Research-Turk 519 This paper reviews the impact level of exchange rate movements, determination of the structure of exchange rate risk position on the basis of currency and also determination of the approaches to exchange rate risk management in the tobacco industry which has very high concentration level. It’s found that the firms want to hedge against the exchange rate risk particularly in the export transactions. A significant number of firms don’t use exchange rate risk management systematically. The firms prefer operational hedging much more than financial hedging. The primarily reasons of not using financial tools in the exchange rate risk management are the presence of import transactions and the expectation of exchange rate increase. Finally, it’s concluded that the firms use foreign currency loans as a tool for exchange rate risk management in order to balance their exchange rate risk position.

The determinants of exchange rate risk management in developing countries: evidence from Indonesia

Studies on exchange-rate risk management in developing countries are still very rarely addressed. This study investigates determinants of exchange rate risk management (hedging) in Indonesian firms. Using 276 samples of listed firms in the Indonesia Stock Exchange and employing a Logit regression model, we found that only firm size is associated with a hedging in the listed companies. The findings are not consistent with the study proposed in the developed countries. It suggests that most of the large Indonesian companies are conglomerates with controlling shareholders who have the authority for hedging and making financing decisions. The finding also suggests that the hedging market in Indonesia is not yet mature. Furthermore, firms are either not familiar with the hedging instruments or may not be big enough to hire professionals to deal with the complicated and costly hedging instruments.

Buy-back and Revenue-Sharing Contracts in Global Supply Chain

Purpose: The main propose of this study is to investigate how exchange rate risk affects the buy-back and revenue-sharing contracts in the global supply chain, hence to improve the performance of global supply chain. Design/methodology/approach: Based on a two-echelon global supply chain, with the model equilibrium, this paper studies the difference between the buy-back contract and the revenue-sharing contract. By the transmitting of the exchange rate risk, it discusses the node-enterprises’ optimal strategies. Findings: The result shows that: (1) Both these two contracts can diminish the inefficiency caused by demand risk, but none of them can manage the exchange rate risk. (2) No matter which currency is used to settle the payment, both these two contracts will lead to the transmitting of exchange rate risk from one node-enterprise to another. (3) When the currency of the supplier’s country in the relatively appreciating, it is better to use the buy-back contract; when the currency of the supplier’s country in the relatively depreciating, the revenue-sharing contract will lead to a better result. Research limitations/implications: Though this study analyzes how the exchange rate risk affects these two contracts, it based on the assumption that node-enterprises’ goal is maximizing theirs expected profit. In fact, many firms not only focus on maximizing theirs expected profit; the risk-taking is also an important concern. For future researches, how firms’ risk-preferences affects theirs decisions in the global supply chain will be an interesting question. Also, will there be any difference if consider the node-enterprises’ utility functions instead of the expected profit. Originality/value: Existing literature about the global supply chain mainly focus on the exchange rate risk management, few of them considers the double marginalization effect caused by the demand risk. Therefore, with the exchange rate fluctuation, we discuss the difference between the buy-back contract and the revenue-sharing contract.

Explore the Application of Financial Engineering in the Management of Exchange Rate Risk

In the background where the domestic enterprises commonly have a weak protection consciousness against the exchange rate risk, this article makes a deep analysis based on the definition of exchange rate risk and its cause. By comparison of the traditional management method of exchange rate risk with another one based on financial engineering tools, it also deeply analyzes the method to use the financial engineering technology in the management of exchange rate risk, and concludes the primary purpose of exchange rate risk management is for hedging. This article proposes an optimal analysis method in two aspects, namely the minimum risk and maximum efficiency, for the forward-based optimal hedging, and proposes an optimal analysis method of dynamic hedging for the optimal hedging of option-based tools. Based on the description of the application of financial tools in foreign exchange futures, forward contract, currency exchange and foreign exchange option, it makes an empirical analysis on the management of foreign exchange risk by taking an assumed T company as the carrier and based on the trading tools of forward foreign exchange and currency option, which describes the operation procedure of financial tools in a more direct way and proves the efficiency of the optimal analysis method of this article.

Managing the Drivers of Cost Escalation in the Road Development Sector: An Overview

The management of construction cost escalation requires that proponents understand the drivers of project cost. The aim of this research was therefore to evaluate the causes of project cost escalation with a case study in Ghana. The research was carried out using quantitative approach by distributing questionnaires to built-environment professionals and stakeholders in the road sector. Findings suggest that fluctuations in cost indices, variation in work due to incomplete scope definition, corruption, unstable exchange rate, schedule delays, and poor risk management are the major key drivers affecting cost escalations on road projects in Ghana. The study held that the lead times allowed between base dates of estimates, actual award and commencement date of the project has a contributing factor for cost escalations. To manage cost escalation, the challenge of incomplete scope definition and instability in micro economic indicators must be managed by the players of the economy. To curtail corruption, the procedures for the awarding of contracts which are subjective with public officials having discretions to determine the least evaluated bidders even though there are procedures for determination, must be reviewed. The use of such discretionary powers accounts for perceived corruption along with contractor behaviour resulting in under dealings. The bidding and award stage of projects mark the beginning of interaction between public official and contractors and hence, the hatching point for project corruption. It is recommended that the management of cost escalation would require the improvement of the governance structures and procurement process for public sector projects. The conclusion of the survey suggests that a holistic approach is required to control the trend but more importantly, on attitudes of officials involved which would require improved ethical commitment.

Exchange rate risk management: What can we learn from financial crises?

Since most present studies on exchange rate risk have pointed out that it does exist, firms need to hedge all currencies in use. However, by examining the discrepancy between cost-side and revenue-side exposures across two major financial crises for Taiwanese firms, we find that the exposure mainly comes from the revenue side during the subprime crisis, while that comes from the cost side during the Asian crisis. Our results offer an applicable implication that as long as the cost-based or revenue-based hedging strategy can acquire same hedging benefit and effectively reduce hedging cost.

Tail events in the FX markets since 1740

Purpose – The purpose of this paper is to explore the extent of the so-called “small-sample problem” within quantitative exchange-rate risk management. Design/methodology/approach – The authors take a closer look at the frequency distribution of nominal price changes in the European foreign exchange markets. Findings – The analysis clearly illustrates the risk of seriously underestimating the probability and magnitude of tail events when frequency distributions are derived from fairly short data samples. Practical implications – The authors suggest that financial institutions and regulators should have an eye for the long-term historical perspective when designing sensitivity tests or “worst case” scenarios in relation to risk assessments and stress tests. Originality/value – The authors add to the literature by analysing the distribution of nominal exchange-rate fluctuations on the basis of a unique quarterly data set for ten European exchange-rate pairs covering a time span of 273 years constructed by the authors. To the best of the authors' knowledge this is the first study on nominal exchange-rate changes for a large number of exchange-rate pairs based on quarterly data spanning almost three centuries.

El peso mexicano: la gestión de cobertura del riesgo cambiario mediante la teoría de los efectos olvidados

This paper is about developing a nonlinear model to predict the behavior of future exchange rate based on the opinion of the economic agents participating in the dollar/peso market. Such views are treated with Fuzzy Logic and a variant of it, known as the Theory of Forgotten Effects. The aim is to find a mechanism for making coverage decisions that allow us an optimal exchange rate risk management at a lower cost than that which involves operations with traditional hedging instruments. For the period of investigation and applying this model, the results support that the collective opinions of economic experts involved in the decision making risk management of exchange rate provide better results than those using traditional methods in the future markets.

A conditional variance tale from an emerging economy's freely floating exchange rate

This article studies daily return and volatility dynamics in the exchange rate of an emerging market economy Turkey over the recent floating period. We use Generalized Autoregressive Conditional Heteroscedastic (GARCH) and Fractionally Integrated GARCH (FIGARCH) models with various error distributions. Findings show that a parsimonious FIGARCH model with an asymmetric error distribution characterizes the daily Turkish Lira (TL) returns against US dollar and euro considerably well. We find statistically significant asymmetry and peakedness in conditional returns and time-varying volatility with long-range dependence in conditional volatility. Long memory finding is robust to different specifications for the conditional returns as well as possible shifts in the return and volatility dynamics over sub-periods. Results in the article show that despite the decline in volatility over the course of the recent float, TL returns are still wild compared to developed economies exchange rates during the same period. Findings have implications for exchange rate regime choice, policy and risk management in Turkey and other emerging market economies.

Currency Exposure of Listed Electronics Companies to Exchange Rates with Different Lag Periods

Currency exposure measurement is essential to exchange rate risk management with instruments in financial engineering. We investigate the currency exposure of electronics companies of China by using the Shanghai and Shenzhen A-Share market listed companies as a basis for our sample. Using distributed-lag model, we analyze the sensitivity of their stock returns to exchange rates with different lag periods. We also consider the influences of the 2008 global crisis and the Sino-US exchange rate dispute. Empirical results indicate that the whole electronics industry is facing a significant lagged currency exposure, but the appreciation of RMB is not harmful to all of the companies, with a few of them benefited from it.

Exchange Rate Risk Management: Evidence from East Asia

The recent East Asian financial crisis provides a natural experiment for investigating foreign exchange risk management by nonfinancial corporations. During this period, the financial crisis exposed local firms to large depreciations in exchange rates and reduced access to foreign capital. The authors explore the exchange rate hedging practices of firms that hedged exposure to foreign debt in eight East Asian countries between 1996 and 1998. They identify and characterize East Asian companies that used foreign currency derivatives, documenting differences in size, financial characteristics, and exposure to domestic and foreign debt. They investigate the factors improtant in the use of foreign currency derivatives. Unlike studies of US firms, they find limited support for existing theories of optimal hedging. Instead, they find that firms use foreign earnings as a substitute for hedging with derivatives. And they find evidence that firms engage inselectivehedging. They investigate the relative performance of hedgers during and after the crisis. They find no evidence that East Asian firms eliminated their foreign exchange exposure by using derivatives. Firms that used derivatives before the crisis performed just as poorly as nonhedgers during the crisis. After the crisis, firms that hedged performed somewhat better than nonhedgers, but this result appears to be explained by a larger post-crisis currency exposure for hedgers (an exchange rate risk premium), which had limited access to derivatives during this period.

Chinese Exporters, Exchange Rate Exposure, and the Value of the Renminbi

This paper examines the currency exposure and exchange rate risk management at Chinese textile and apparel exporters. Chinese exporting firms have large net exposure to the US dollar. On average a 10 percent increase in the value of the renminbi against the dollar would reduce net revenues by 5.4 percent if the firms left prices unchanged. This large exposure is driven heavily by the choice of export pricing currency by the firms. The regional distribution of sales is more balanced across the major export markets of the US, EU, and Japan. However many firms are unaware of their indirect currency risk to currencies other than the dollar and most firms undertake little or no activities to hedge their foreign currency exposure, direct or indirect. The large dollar exposure of Chinese exporters may help explain the reluctance of the People's Bank of China to allow the RMB to undergo a rapid appreciation against the dollar.

Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms

Measuring and managing exchange rate risk exposure is important for reducing a firm's vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm's exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical vs. strategical and passive vs. active hedging. In addition, it outlines a set of widely-accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by US firms.

Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms

Measuring and managing exchange rate risk exposure is important for reducing a firm's vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm's exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical versus strategical and passive versus active hedging. In addition, it outlines a set of widely accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by U.S. firms.