Foreign Exchange Risk Management
Topics: Foreign exchange market, Exchange rate, United States dollar, Currency / Pages: 62 (15391 words) / Published: Mar 16th, 2013

How is foreign exchange risk managed? An empirical study applied to two Swiss companies.


This paper investigates how two Swiss companies manage their foreign exchange risk and compares the results to theoretical findings and to previous empirical research. We find significant differences in the foreign exchange risk management policies, notably in the choice of the type of exposure to cover and in the hedging instruments used. Consistent with previous research, forwards and netting are the most used instruments and transaction exposure is the most managed foreign exchange risk. Surprisingly, translation and economic exposures are not well identified and managed mainly because firms believe it is unnecessary or too complex. Finally, firms hedge their exposure but never fully due to high cost of hedging. Executive summary

Among the key findings are the following:

(1) Centralization of foreign exchange (FX) risk management is recommended by the theory. Logitech follows this recommendation whereas Kudelski uses a mixture of a centralized and non-centralized organization. (2) Most firms, including Logitech and Kudelski, do hedge. Theory presents arguments both in favor and against hedging but the view in favor of hedging predominates. However, companies never hedge fully because it is expensive and they prefer to hedge in the short-term. (3) Theory argues that a firm should first use internal hedging techniques and then, if necessary, pass to external hedging techniques. The main argument is that external hedging is costly. In practice, firms follow this strategy; Logitech and Kudelski do natural hedging whenever it is possible. (4) Forwards and natural hedging are the most popular instruments to manage FX risk in practice. Both Logitech and Kudelski state them as their main hedging techniques. (5) Measuring FX risk can be very difficult and

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