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Managing exchange rate exposure with hedging activities: New approach and evidence

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  • Bae, Sung C.
  • Kwon, Taek Ho
  • Park, Rae Soo

Abstract

Undocumented in the literature, we show that the effectiveness of firms' hedging activities depends on the underlying characteristics (e.g., direction) of firms' expected exchange rate exposure that reflects exchange rate risk associated with firms’ inherent business prior to the usage of hedging activities. While firms with positive expected exposure reduce their exposure through currency derivatives, internal transactions with foreign subsidiaries, and foreign currency debt financing, firms with negative expected exposure do so only through exchange rate pass-through activities. Our results strongly suggest that both the conditions in the product markets (e.g., export, import, and profit margin) and the direction of exchange rate exposure be considered to uncover the effectiveness of hedging activities.

Suggested Citation

  • Bae, Sung C. & Kwon, Taek Ho & Park, Rae Soo, 2018. "Managing exchange rate exposure with hedging activities: New approach and evidence," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 133-150.
    • Handle: RePEc:eee:reveco:v:53:y:2018:i:c:p:133-150
    DOI: 10.1016/j.iref.2017.10.017
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    References listed on IDEAS

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    Cited by:

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    2. Barbi, Massimiliano & Romagnoli, Silvia, 2018. "Skewness, basis risk, and optimal futures demand," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 14-29.
    3. Ekta Sikarwar & Roopak Gupta, 2019. "Economic exposure to exchange rate risk and financial hedging," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(4), pages 965-984, August.
    4. Zamzamir, Zaminor & Haron, Razali & Baharul Ulum, Zatul Karamah Ahmad & Abdullah Othman, Anwar Hasan, 2021. "Non-linear relationship between foreign currency derivatives and firm value: evidence on Sharī‘ah compliant firms," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 28, pages 156-173.

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    More about this item

    Keywords

    Hedging activities; Expected exchange rate exposure; Observed exchange rate exposure; Korean firms;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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