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What Lies Beneath: Foreign Exchange Rate Exposure, Hedging and Cash Flows

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Author Info
Bartram, Söhnke M.

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Abstract

This paper presents results from an in-depth analysis of the foreign exchange rate exposure of a large nonfinancial firm based on proprietary internal data including cash flows, derivatives and foreign currency debt, as well as external capital market data. While the operations of the multinational firm have significant exposure to foreign exchange rate risk due to foreign currency-based activities and international competition, corporate hedging mitigates this gross exposure. The analysis illustrates that the insignificance of foreign exchange rate exposures of comprehensive performance measures such as total cash flow can be explained by hedging at the firm level. Thus, the residual net exposure is economically and statistically small, even if the operating cash flows of the firm are significantly exposed to exchange rate risk. The results of the paper suggest that managers of nonfinancial firms with operations exposed to foreign exchange rate risk take savvy actions to reduce exposure to a level too low to allow its detection empirically.

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File URL: http://mpra.ub.uni-muenchen.de/6661/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6661.

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Date of creation: 31 Jul 2007
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Handle: RePEc:pra:mprapa:6661

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Related research
Keywords: Foreign exchange rates; exposure; risk management; cash flow; derivatives; corporate finance;

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Find related papers by JEL classification:
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
F3 - International Economics - - International Finance
G3 - Financial Economics - - Corporate Finance and Governance

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  1. Bartram, Söhnke M. & Bodnar, Gordon, 2005. "The Exchange Rate Exposure Puzzle," MPRA Paper 6482, University Library of Munich, Germany. [Downloadable!]
  2. Bartram, Söhnke M. & Burns, Natasha & Helwege, Jean, 2007. "Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions," MPRA Paper 10122, University Library of Munich, Germany, revised 21 Aug 2008. [Downloadable!]
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