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Managing exchange rate exposure with hedging activities: New approach and evidence

Sung C. Bae, Taek Ho Kwon and Rae Soo Park

International Review of Economics & Finance, 2018, vol. 53, issue C, 133-150

Abstract: Undocumented in the literature, we show that the effectiveness of firms' hedging activities depends on the underlying characteristics (e.g., direction) of firms' expected exchange rate exposure that reflects exchange rate risk associated with firms’ inherent business prior to the usage of hedging activities. While firms with positive expected exposure reduce their exposure through currency derivatives, internal transactions with foreign subsidiaries, and foreign currency debt financing, firms with negative expected exposure do so only through exchange rate pass-through activities. Our results strongly suggest that both the conditions in the product markets (e.g., export, import, and profit margin) and the direction of exchange rate exposure be considered to uncover the effectiveness of hedging activities.

Keywords: Hedging activities; Expected exchange rate exposure; Observed exchange rate exposure; Korean firms (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.iref.2017.10.017

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