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The management of foreign currency risk: derivatives use and the natural hedge of geographic diversification

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  • Stephen Makar
  • Jay DeBruin
  • Stephen Huffman

Abstract

This study investigates how large US multinational companies use foreign exchange derivatives (FXDs) to manage currency risk. The study tests whether a company's use of FXDs is associated with its exposure to changing exchange rates, and whether such risk management practices are affected by the company's degree of geographic diversification indicative of natural hedging. To date, the empirical evidence on the use of derivatives by large companies is limited, and the impact of geographic diversification on FXD use, in particular, has not been investigated. This study addresses such a gap in the literature and provides results that are consistent with expectations. Specifically, the evidence indicates that large companies' FXD use increases with the level of foreign currency exposure as well as with the degree of geographic concentration indicative of using less natural hedging. Evidence consistent with economies of scale in FXD use is also provided.

Suggested Citation

  • Stephen Makar & Jay DeBruin & Stephen Huffman, 1999. "The management of foreign currency risk: derivatives use and the natural hedge of geographic diversification," Accounting and Business Research, Taylor & Francis Journals, vol. 29(3), pages 229-237.
    • Handle: RePEc:taf:acctbr:v:29:y:1999:i:3:p:229-237
    DOI: 10.1080/00014788.1999.9729583
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    References listed on IDEAS

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    Cited by:

    1. Tscheke, Jan, 2016. "Operational Hedging of Exchange Rate Risks," Discussion Papers in Economics 30227, University of Munich, Department of Economics.
    2. Swidan, Hassan & Merkert, Rico & Kwon, Oh Kang, 2019. "Designing optimal jet fuel hedging strategies for airlines – Why hedging will not always reduce risk exposure," Transportation Research Part A: Policy and Practice, Elsevier, vol. 130(C), pages 20-36.
    3. Elliott, William B. & Huffman, Stephen P. & Makar, Stephen D., 2003. "Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk?," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 123-139, April.
    4. Prockl, Günter, 2011. "Comment on supply chain risk management," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 65(2), pages 193-196.
    5. Hofmann, Erik, 2011. "Risk management in international supply chains: the case of natural hedging," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 65(2), pages 155-192.
    6. Alpa Dhanani & Roger Groves, 2001. "The management of strategic exchange risk: evidence from corporate practices," Accounting and Business Research, Taylor & Francis Journals, vol. 31(4), pages 275-290.

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