The German humpback: Internationalization and foreign exchange hedging

Tom Aabo and Rasmus Ploeen

Journal of Multinational Financial Management, 2014, vol. 27, issue C, 114-129

Abstract: Previous studies find a monotonic positive relationship between a firm's internationalization and its foreign exchange hedging. We argue that high levels of internationalization can reduce the need for foreign exchange hedging through diversification (e.g. sales to several markets) and operational hedging (matching of cash flows and operational flexibility). We employ multivariate regression analysis and find an inverse U-shape relationship (“humpback”) for large listed non-financial German firms. Foreign exchange hedging activity peaks when half of sales (or long-term assets) is outside Europe. We do not find support that diversification or production facilities abroad drive our results. Our paper is the first empirical paper to document an inverse U-shape relationship between internationalization and foreign exchange hedging.

Keywords: Internationalization; Foreign exchange hedging; Diversification; Cash flow matching; Operational flexibility (search for similar items in EconPapers)
JEL-codes: F23 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:27:y:2014:i:c:p:114-129

DOI: 10.1016/j.mulfin.2014.05.001

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