Behavioral Biases in Managing Foreign Exchange Risk

Ziqi Cao ()
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Ziqi Cao: The University of Sydney

A chapter in Proceedings of the 2025 7th International Conference on Economic Management and Cultural Industry (ICEMCI 2025), 2025, pp 84-92 from Springer

Abstract: Abstract Behavioral finance theory proposes that cognitive biases, like overconfidence, loss aversion, and anchoring, have a strong impact on corporate decision-making. This paper explores their impact on foreign exchange (FX) risk management through three real-life case studies involving large multinational and Chinese firms. Each case identifies the prevalent behavioral bias linked to managerial actions and analyzes its consequences. The cases include Volkswagen’s 2003 partial hedging strategy (anchoring and overconfidence), CITIC Pacific’s speculative currency bets in 2008 (overconfidence and “gambling” behavior), and Chinese airlines’ under-hedging during the 2014 renminbi volatility (anchoring and loss aversion leading). This article draws on financial reports, media coverage, and academic research to demonstrate how biased decisions led to sub-optimal FX risk management and significant financial losses. The implications for corporate risk management practices are summarized, with emphasis on the importance of recognizing and mitigating behavioral biases.

Keywords: behavioral finance; foreign exchange (FX) risk; cognitive bias (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-888-2_11

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DOI: 10.2991/978-94-6463-888-2_11

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