Should a Firm Manage its Exposure?

Richard Friberg
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Richard Friberg: Stockholm School of Economics

Chapter 4 in Exchange Rates and the Firm, 1999, pp 23-32 from Palgrave Macmillan

Abstract: Abstract Exchange rate variability will cause the profits, and the value, of an exposed firm sometimes to be higher, sometimes lower. Is this aproblem – should you as manager worry about this at all? In this chapter we will discuss if economic exposure should be hedged. Economic exposure is, as noted in the last chapter, concerned with the sensitivity of cash flows to exchange rates. Here we will concentrate on management of exposure using financial instruments. That is, we takethe exposure of cash flows in themselves as given, and discuss reasons for limiting the ultimate effect on firm value and cash flows by creating offsetting exposure from financial contracts. The financial contracts used for management of exposure will be discussed in Chapter 5. The other way of managing exposure would be to modify the commercial cash flows themselves. Crudely put, one way for an exporter to manage its exposure is to cease being an exporter. Those kinds of issues will be discussed in Chapter 9. For now take the commercial cash flows as given. Should a firm strive to lower exposure by the use of financial instruments? There are some relevant reasons for doing this. Most observers agree that hedging of accounting exposure is not relevant — we postpone that discussion until Chapter 10. It should be stressed that it is not at all obvious that a firm should try to limit exposure.

Keywords: Exchange Rate; Gold Price; Investment Spending; Exchange Rate Variability; Concave Relationship (search for similar items in EconPapers)
Date: 1999
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DOI: 10.1057/9780333982372_4

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