Financial theory offers several rationales for financial risk management. Hedging enables firms to maintain their access to internal funds as well as reduces the costs of financial distress. The theoretical framework offers, however, few tools for currency risk identification and for choosing a proper hedging instrument. This Thesis seeks to help firms manage risks better by defining the currency risk exposures of a multinational corporation, by describing their effects on the cash flows, profit and loss and balance sheet of the corporation as well as by comparing the applicability of currency forwards and currency options in hedging these exposures. The exposure framework is constructed based on an extensive literature review of financial risk management articles. The effects of currency exposures on cash flows, profit and loss and balance sheet are modeled. The model further takes into account current accounting standards regarding derivatives. The model is applied on a stock-listed corporation by conducting a historical simulation of its EURUSD currency risk. The simulation makes it possible to study the effects of currency rate movements and the differences between hedging strategies. The exposures identified include currency risk in contracted as well as anticipated cash flows, in competitive environment, in foreign net assets and consolidated profits, in loans and investments as well as in loan covenants. The model shows that different exposures and, similarly, different hedging instruments, have differing effects. An important observation is that the most commonly used hedging instrument, a currency forward, performs optimally only in the case of one exposure – contracted cash flows. When hedging other exposures forward hedging creates challenges – for example it may tie large amounts of liquidity. Conversely, a purchased currency option performs satisfactorily throughout the study – it is never much worse than the forward but on several measures it performs significantly better. As an example, a currency option limits the over-hedging problem when hedging uncertain cash flows. When hedging exposures in foreign net assets it can be used to avoid cash flow and liquidity challenges of a forward hedge. Furthermore, an option can be used the tackle multiple objectives related to hedging loan covenants. Because of these issues as well as the small counterparty risk of an option hedge, hedging with options is feasible for more companies than forward hedging. Option hedging is also possible for distressed firms most in the need of hedging. The results of the Thesis can be explained by the fundamental characteristics of forwards and options. Thus, they can be applied even to other firms and liquid currency markets. The model can be developed further by conducting a stochastic simulation of currency risk as well as by including additional parameters such as price elasticity of exports. Date: 10.5.2010 Language: English Number of pages: 99
Keywords: currency, currency rate, foreign exchange, FX, financial risk, exposure, risk management, hedging, hedge accounting, derivative, multinational corporation
Aalto-yliopisto Teknillinen korkeakoulu Informaatio- ja luonnontieteiden tiedekunta Tekijä: Jari Liede
Työn nimi: Kansainvälisen yrityksen valuuttariskipositioiden suojaaminen Title in English: Hedging currency exposures in a multinational corporation Koulutus-ohjelma: Teknillisen fysiikan koulutusohjelma Pääaineen nimi: Systeemi- ja operaatiotutkimus Sivuaineen nimi: Yritysstrategia ja kansainvälinen liiketoiminta
Opetusyksikön (ent. professuuri) koodi: Mat-2 Sovellettu matematiikka Työn valvoja: Professori Ahti Salo Työn ohjaaja(t): KTM Roger Wessman
Rahoitusteoriassa on esitetty useita perusteluita sille, että yritysten tulisi suojata valuuttariskejään. Suojaamalla voidaan esimerkiksi turvata investoinnit varmistamalla kassavirtarahoitus sekä...