Foreign Exchange Volatility: Group hedging theory and Lebanese SMEs

Topics: Foreign exchange market, Exchange rate, Currency Pages: 86 (19687 words) Published: July 9, 2014
Middle East University
Faculty of Business Administration

Foreign Exchange volatility: Group
hedging theory and Lebanese SMEs

A Thesis
Presented in Partial Fulfillment
of the Requirements for the Degree
Master of Business Administration

By
George Issa

June 2014

FOREIGN EXCHANGE VOLATILITY: GROUP HEDGING THEORY
AND LEBANESE SMEs

A thesis
presented in partial fulfillment
of the requirements for the degree
Master of Business Administration

By: George Issa

APPROVAL BY THE COMMITTEE:
------------------------------- -------------------------------------

Paul Abboud, Ph.D., Chairperson
------------------------------- ------------------------------------Denny Rumamby, Ph.D., Second Reader ------------------------------- ------------------------------------Patrizia Hongisto, Ph.D., Faculty Dean

Date approved
-----------------------------

I

Dedication
To everyone who will make use of my research.
To everyone who will enjoy reading every page!
To mom and dad and my lovely sisters.
To the memory of my uncle.

II

Acknowledgments
I would like to thank my university’s higher management represented by our kind Dean of Business Dr. Patrizia Hongisto.
A feel of gratitude remains to my thesis mentor, Dr. Paul Abboud who gave me the helping hand to come up with this final thesis. Big thanks to my second reader, Dr. Denny Rumambi for his fruitful comments.

Thanks extended to my bosses at the Lebanese Armed Forces for the opportunity they granted me to follow the MBA program at MEU. To my family and friends whom they missed my presence during the long hours spent preparing for this thesis: Please understand me, I love you all. I am thankful to everyone who responded to my survey questions and that I might have bothered with my calls to get the required information that helped the success of this research.

III

Abstract
Foreign Exchange volatility has become a major obstacle for international traders. Making payments or collecting revenues in foreign currencies could harm the company’s profit margins and leaves it under the currency risk of the transaction!

Even with the presence of financial derivatives that could limit the exposure of those traders, many Lebanese SMEs do frequently change their products prices to reflect exchange rate changes.
That is due either to the lack of financial knowledge in these markets or due to transaction costs incurred to financial intermediaries or both. Price volatility will negatively affect the customers’ loyalty and could push them shop their products from competitors'. Larger businesses do follow different hedging strategies having a goal to reach Price stability as it is one of the major customer retention strategies.

In our paper, we will elaborate the Obegi "group hedging theory", its advantages to the several entities and how the other Lebanese SMEs, who are not capable of investing on financial entities, could benefit from such experience.

IV

The paper highlights the importance of having one international currency for international trade. The SDR which is backed by major hard currencies representing more than 80% of the world’s output, will eliminate neither local currencies nor the role of speculators in the market, but will eliminate the currency risk exposure of traders in weaker economies and make them alive in a highly volatile world and safeguards their Purchasing Power Parity. Keywords: Currency Risk; Hedging; SMEs; Volatility; Transaction costs; Group hedging; BTA; SDR; Speculation.

V

List of tables:
Table 1: Import/ Export of goods in Lebanon denominated in US$ ……..6 Table 2: Netting table from different currency exposure………………….36 Table 3: Comparative table between different hedging alternatives………46

VI

Table of contents:
Dedication.......................................................................................................................... II Acknowledgments...
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