Corporate Strategies for Currency Risk Management (Management Project)
Currency fluctuations are a global phenomenon, and can affect multinational companies directly through their cash flow, financial result and company evaluation. The exposure to currency risks might however be covered against or ‘hedged’, as it is called, by different external and internal corporate strategies.
However, some of these strategies might include a risk themselves as they can be expensive and uncertain. It is therefore an interesting question whether if these strategies are actually applied in practice, and if so which strategies are favored and why.
The purpose of this thesis is to present and explain the different external and internal hedging techniques and to see which, or if any, strategies are favored by large, medium-sized and small companies and for what reasons.
Regarding primary data, interviews with a mostly qualitative profile have been used to discuss the subject with respondents from six companies, diversified in size using the classification from the European Commission. Secondary data has been collected through literature from the university library and internet sources.
Large companies primarily use the strategy of forwards, since they carry high elements of risk aversion, predictability and simplicity. For internal strategies, large companies prefer netting. Small companies extensively use matching because the routine is easy to establish and handle. Medium-sized companies can use either one so much depends on the risk-aversion and cash-flow management of the company. Large companies continuously regard currency risk a big factor, whereas small companies have just recently started due to the dollar depreciation. Translation exposure should be considered a big risk regardless of the company size, if the company is the main one in a corporate group. Finally, the subject of currency risk management is very theoretically broad, but its appliance in practice is very slim as only a few strategies are actually favored and frequently used.
Source: Mälardalen University
Author: Sarkis, Sumbat | Shu, Chang