Foreign Fx Hedging in Mne's

Topics: Foreign exchange market, Exchange rate, United States dollar Pages: 10 (3556 words) Published: December 2, 2012
Multinational Enterprises (MNEs) are some of the most powerful and influential entities on our planet. They possess fantastic capabilities and have enormous sway in people’s decisions and perceptions. The personal electronic industry has particularly interesting characteristic for the largest and most influential firms because of the way personal electronics have become so integrated and involved in our daily activities. This creates opportunities for firms to have broad international presences and generate cash flows in a variety of different currencies. Obviously, firms enjoy expanding their market share, but with international profits come and element of risk that must be taken into consideration. Foreign exchange rates and variances can cause serious issues for firms involved in international markets. Thankfully, firms can engage in hedging strategies to create systems that mitigate this risk. Allayannis and Weston (2001) found that hedging using financial derivatives increased firm value by an average of around 5% for non-financial firms based in United States, so it appears that there is a strong business case for hedging, beyond just managing risk appropriately. Jin and Jorion (2006), elaborate on this research with reference to oil and Gas firms, but find that it varies from industry to industry. For our analysis, we wanted to focus on major players in the personal electronic industry and compare and contrast their hedging strategies in detail. In particular, we focused on Apple Inc., Sony Corporation, HTC Corporation and Nokia Corporation. These selected firms gave us flexibility in our analysis. They compete for a similar market, yet all report financial details in different currencies, deal with different suppliers, and have different strategies in the markets. With these differences in mind, we were still expecting to come across similarities that offer some insight about successful hedging strategies in this competitive industry. Research methodology and hypothesis

Our main research method was to examine data from the external financial statements of the selected firms, where information regarding hedging strategies, foreign exchange gains or losses and other relevant information is found. We also thought it was important to look for peer reviewed research on the topic, so where applicable we included that in our report. Additionally, we found it beneficial to examine data about individual foreign exchange markets that would be relevant for the individual company. This gave us several avenues with which to compare the companies, and generate solid conclusions about our findings. Going into the report, we thought that in general, the four chosen companies would use hedging to lock in future costs and revenues using a combination of forward and option contracts. They would clearly state how this mitigated their risk and discuss important decision. We developed the following hypothesis that we would test over the course of our research and base our discussions around: Firms will use extensive hedging to mitigate cash flows and reduce foreign exchange exposure, including a wide variety of contracts and lengths of term specific to industry needs. Hedging for MNE’s

Hedging is a risk management strategy used in limiting or offsetting probability or loss from fluctuations in the prices of commodities, currencies, or securities. Hedging includes swaps, options, and forward contracts and is used in a variety of different ways. There are two kinds of general hedges in the market: fair value hedging and cash flow hedging. Fair value hedging is managing the risk to changes in fair value of a recognized asset or liability, or a previously unrecognized firm’s commitment to buy or sell an asset at a fixed price. Cash flow hedging on the other hand is management of the exposure to variability in cash flow that is attributable to a particular risk associate with a recognized asset or liability or a highly...
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