Short-term foreign exchange risk management: Zero net exposure models

Martha S Hollis

Omega, 1978, vol. 6, issue 3, 249-256

Abstract: By balancing the relevant end of period assets and liabilities (i.e. a zero net exposure approach to foreign exchange risk management) the multinational corporate treasurer can, conservatively, protect against parity fluctuations without requiring exchange rate forecasts. This paper presents two goal programming formulations for short-term money management and evaluates the resulting strategies (via simulation) in terms of their impact on corporate profits. A hypothetical multinational corporation with headquarters in the US and subsidiaries in Canada, West Germany, and the United Kingdom serves as the experimental unit. The results suggest that the zero net exposure approach is no better than a naive 'dart-throwing' approach.

Date: 1978
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