Managing strategic exchange rate exposures: evidence from UK firms

Abstract

The effect of exchange rate movements on firm value is important to firms engaged in international transactions. These accounting exposures can be managed using financial instruments. However, the competitive or strategic effects that create economic exposure require firms to adopt a strategic approach. This paper reports on the extent to which large, publicly-listed UK firms adopt a strategic approach to the management of exchange rate risk. Unlike earlier studies, the results indicate the widespread use of a range of operational hedging techniques. A significant proportion of firms are also found to incorporate currency risk management as a factor in decisions made by their operating departments. However, the study also indicated considerable variation in the application of operational techniques between firms and industry sectors.

The Importance of Corporate Foreign Debt in Managing Exchange Rate Exposures in Non‐Financial Companies

“…Following Caves (1971) we use subsidiaries abroad as a proxy for commitment and exposure to a foreign market. Bradley and Moles (2002) find that 84% of a sample of UK firms that do have foreign subsidiaries use foreign debt while only 20% of the firms that do not have foreign subsidiaries use foreign debt. Kedia and Mozumdar (2003) also find that firms with greater foreign operations are more likely to issue foreign debt.…”

Foreign Debt Usage in Non‐Financial Firms: a Horse Race between Operating and Accounting Exposure Hedging

“…Analysing a sample of non‐financial listed UK firms, Bradley and Moles () find that 84% of the 202 firms that do have foreign subsidiaries use foreign debt, while only 20% of the 87 firms that do not have foreign subsidiaries use foreign debt. The corresponding figures in our sample are 80% of 121 firms and 49% of 65 firms.…”

Supply chain risk management – I: Conceptualization, framework and planning process

“…The risk management approaches to deal with these three distinct risks can vary substantially. In a similar vein, the identification of three distinct types of currency fluctuation risks in finance (transaction, translation and competitive/economic risks) enables firms to establish effective risk management strategies (Triantis 2000, Bradley andMoles 2002). The approach to manage the transaction risk is completely different, in various aspects, from that used to manage the competitive risk.…”

“…Kim et al (2005) find out from the results of their empirical study that firms exposed to currency exchange rate fluctuation effectively use currency derivatives to manage the transaction risks and use operational geographic dispersion to manage the competitive risks. Bradley and Moles (2002) explain that the difference in the strategies used to manage these two risks is due to the characteristics of these risks. While the transaction risk is a direct outcome of the currency exposure thus making it easy to identify and manage, the competitive risk, on the other hand, is an indirect outcome of the currency exposure and hence difficult to manage.…”