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H. Kent Baker and Leigh A. Riddick

Print publication date: 2012

Print ISBN-13: 9780199754656

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199754656.001.0001

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Corporate Management of Foreign Currency Risk: Conceptual Framework, Policies, and Strategies

Corporate Management of Foreign Currency Risk: Conceptual Framework, Policies, and Strategies

Chapter:
(p.447) 21 Corporate Management of Foreign Currency Risk: Conceptual Framework, Policies, and Strategies
Source:
International Finance
Author(s):

RAJ AGGARWAL

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199754656.003.0021

In perfectly efficient markets, managing business exposure to losses associated with currency changes should not result in added value since unanticipated changes cannot be hedged costlessly. In practice, however, many reasons exist for managing such exposure because markets are not perfectly efficient. First, deviations often occur from parity conditions because foreign exchange markets are not perfectly efficient. Second, due to the nature of the costs associated with foreign exchange risks, managing foreign exchange exposure to reduce variability can increase firm value. Third, long-term and recurring exposure to foreign exchange risk cannot be managed using traditional financial market-based hedging techniques because the markets for such products are thin and inefficient. Firms must use more costly marketing, production, and financial strategies to manage economic exposure and protect against losses in value related to long-term changes in exchange rates. Further, this process must be integrated with strategic planning in each of these areas. This chapter discusses these issues and presents currency risk management strategies that account for well-documented agency costs and market imperfections.

Keywords:   foreign exchange, currency risks, global finance, financial strategy, transactions exposure, accounting exposure

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