The Foreign Exchange Exposure Management Practices of Finnish Industrial Firms

Abstract

This study employs questionnaire survey and financial accounting data to extend earlier empirical work on the foreign exchange (FX) exposure management practices of Finnish industrial firms. The paper concentrates on: (i) the form that FX corporate hedging policy takes; (ii) the control of FX procedures and trading; and, (iii) our respondents' perceptions about their ability to predict FX rate changes for hedging decisions. Our results indicate that the extent to which firms hedge FX exposure depends on the type of exposure and the form that FX hedging policy takes. Also, a significant number of the firms pursue FX hedging strategies on the expectation of attaining trading profits and this strategy appears to be accommodated within their FX policies. This feature is not explicitly demonstrated in previous studies. Finnish firms hedge a much higher proportion of both transaction and translation exposures compared to economic exposure. We partly attribute this emphasis to the requirements of the Finnish Accounting Act, which came into effect in 1993. The organisational, historical and financial settings of the firms also have significant impacts on exposure management practices. The overall implication of those results is that firms respond to changes in the financial, economic and regulatory environments in which they operate.

Interaction between real options and financial hedging: Fact or fiction in managerial decision‐making

“…Studies covering non-US companies (e.g. Alkebäck & Hagelin, 1999;Berkman, Bradbury, & Magan, 1997;Bodnar & Gebhardt, 1999;De Ceuster, Durinck, Laveren, & Lodewyckx, 2000;Hakkarainen, Nathan, Kasanen, & Puttonen, 1998;Joseph & Hewins, 1997) show the same general conclusions. However, non-US companies in open economies tend to be more active derivative users than their US counterparts.…”

Foreign exchange exposure: Evidence from the U.S. insurance industry

“…As longer term exposure is based more on economic exposure management using operational hedges and is more difficult to undertake, such exposure would thus be more pronounced. In a survey of Finnish Industrials, Hakkarainen et al (1998) also find that there exists a much greater propensity to hedge transaction exposure over long-term economic exposure. Nguyen and Faff (2003) document the existence of both long-and short-term exposure for Australian companies and link the time horizon nature of these exposures with the use of foreign currency derivatives.…”

The Characteristics of Foreign Exchange Hedging: A Comparative Analysis

“…Hakkarain, Joseph, Kasanen, andPuttonen (1998), andJoseph (2000), pointed out that because firms exercise considerable flexibility in hedging practice, if this area is not covered, substantial aspects of hedging decision making will be missed.…”