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

  • Bj�rn D�hring
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    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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    Paper provided by Directorate General Economic and Financial 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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    1. 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.
    2. Gordon M. Bodnar & Abe de Jong & Victor Macrae, 2003. "The Impact of Institutional Differences on Derivatives Usage: a Comparative Study of US and Dutch Firms," European Financial Management, European Financial Management Association, vol. 9(3), pages 271-297.
    3. 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.
    4. Philippe Bacchetta & Eric van Wincoop, 2002. "A theory of the currency denomination of international trade," International Finance Discussion Papers 747, Board of Governors of the Federal Reserve System (U.S.).
    5. Kamps, Annette, 2006. "The euro as invoicing currency in international trade," Working Paper Series 0665, European Central Bank.
    6. Alexander Mihailov, 2009. "Exchange rate pass-through to prices in macrodata: a comparative sensitivity analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(4), pages 346-377.
    7. Rui Albuquerque, 2004. "Optimal Currency Hedging," Finance 0405010, EconWPA.
    8. Ugur Lel, 2006. "Currency hedging and corporate governance: a cross-country analysis," International Finance Discussion Papers 858, Board of Governors of the Federal Reserve System (U.S.).
    9. Grassman, Sven, 1973. "A fundamental symmetry in international payment patterns," Journal of International Economics, Elsevier, vol. 3(2), pages 105-116, May.
    10. 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.
    11. Broll, Udo & Eckwert, Bernhard, 1996. "Cross-Hedging of Exchange-Rate Risk," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 282-86, October.
    12. Hartmann, Philipp & Issing, Otmar, 2002. "The international role of the euro," Journal of Policy Modeling, Elsevier, vol. 24(4), pages 315-345, July.
    13. Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 0446, European Central Bank.
    14. Shang-Jin Wei, 1998. "Currency Hedging and Goods Trade," NBER Working Papers 6742, National Bureau of Economic Research, Inc.
    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. 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.
    17. Aline Muller & Willem F. C. Verschoor, 2006. "European Foreign Exchange Risk Exposure," European Financial Management, European Financial Management Association, vol. 12(2), pages 195-220.
    18. 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.
    19. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098, March.
    20. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
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