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Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective

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  • Bj�rn D�hring
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    Abstract

    Domestic-currency invoicing and hedging allow internationally active firms to reduce their exposure to exchange rate variations. This paper argues that domestic-currency invoicing and hedging with exchange rate derivatives allow a fairly straightforward management of transaction and translation risk. Broader economic risk (which takes into account the impact of the exchange rate on competitiveness) is by its very nature harder to manage, but the paper argues that natural hedging provides possibilities for doing so. A novelty of this paper is a survey of actual hedging strategies and techniques of large euro-area corporations. The paper finds that euro-area exporters make ample use of instruments to limit the adverse impact of euro appreciation.

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    File URL: http://ec.europa.eu/economy_finance/publications/publication11475_en.pdf
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 299.

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    Date of creation: Jan 2008
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    Handle: RePEc:euf:ecopap:0299

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    Keywords: Exchange rate risk; invoicing; hedging; derivatives; Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective; Economic Paper; D�hring;

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    References

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    1. Grassman, Sven, 1973. "A fundamental symmetry in international payment patterns," Journal of International Economics, Elsevier, vol. 3(2), pages 105-116, May.
    2. Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 0446, European Central Bank.
    3. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December.
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    5. Harald L. Battermann & Udo Broll & Kit Pong Wong, 2006. "Cross-Hedging Of Exchange Rate Risks: A Note," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 449-453.
    6. Alexander Mihailov, 2004. "The Empirical Range of Pass-Through in US, German and Japanese Macrodata," Money Macro and Finance (MMF) Research Group Conference 2004 44, Money Macro and Finance Research Group.
    7. Wei, Shang-Jin, 1999. "Currency hedging and goods trade," European Economic Review, Elsevier, vol. 43(7), pages 1371-1394, June.
    8. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2002. "Endogenous Exchange Rate Pass-Through When Nominal Prices are Set in Advance," Working Papers 212002, Hong Kong Institute for Monetary Research.
    9. David Hargreaves & Andy Brookes & Carrick Lucas & Bruce White, 2000. "Can hedging insulate firms from exchange rate risk," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 63, March.
    10. Muller, Aline & Verschoor, Willem F.C., 2007. "Asian foreign exchange risk exposure," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 16-37, March.
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    14. Broll, Udo & Eckwert, Bernhard, 1996. "Cross-Hedging of Exchange-Rate Risk," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 282-86, October.
    15. Niclas Hagelin, 2003. "Why firms hedge with currency derivatives: an examination of transaction and translation exposure," Applied Financial Economics, Taylor & Francis Journals, vol. 13(1), pages 55-69.
    16. Kamps, Annette, 2006. "The euro as invoicing currency in international trade," Working Paper Series 0665, European Central Bank.
    17. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
    18. Allayannis, George & Ofek, Eli, 2001. "Exchange rate exposure, hedging, and the use of foreign currency derivatives," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 273-296, April.
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    20. Bodnar, G.M. & Jong, A. de & Macrae, V., 2001. "The Impact of Institutional Differences on Derivatives Usage: A Comparative Study of US and Dutch Firms," Discussion Paper 2001-62, Tilburg University, Center for Economic Research.
    21. Alexander Mihailov, 2003. "Exchange Rate Pass-Through on Prices in Macrodata: A Comparative Sensitivity Analysis," Economics Discussion Papers 568, University of Essex, Department of Economics.
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    Cited by:
    1. Udo Broll & Sabine Hansen-Averlant, 2010. "Exchange rate volatility, international trade and labour demand," International Economics and Economic Policy, Springer, vol. 7(4), pages 423-436, December.

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