Foreign exchange exposure and multinationality

Elaine Robyn Hutson, Elaine Laing

    Research output: Contribution to journalArticleResearchpeer-review

    20 Citations (Scopus)

    Abstract

    We examine the relation between firms foreign exchange exposure and the extent of their multinationality as a proxy for operational hedging. Using a sample of 953 US firms over the period 1999?2006, we show that there is a nonlinear relation between operational and financial hedging, confirming anecdotal evidence that many highly multinational firms do not hedge with derivatives. We find that operational hedging and financial hedging are significantly inversely related to firms foreign exchange exposure, providing evidence that the two hedging techniques are complementary for all but the most highly operationally hedged firms. By comparing our findings for 1999-2006 with 1999-2009, we show that this complementarity breaks down when exchange rate volatility is high - as the effectiveness of financial hedging diminishes. An important message for firms is that operational hedges work, and they potentially provide better protection than financial hedging during times of stress.
    Original languageEnglish
    Pages (from-to)97 - 113
    Number of pages17
    JournalJournal of Banking and Finance
    Volume43
    DOIs
    Publication statusPublished - 2014

    Cite this

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    title = "Foreign exchange exposure and multinationality",
    abstract = "We examine the relation between firms foreign exchange exposure and the extent of their multinationality as a proxy for operational hedging. Using a sample of 953 US firms over the period 1999?2006, we show that there is a nonlinear relation between operational and financial hedging, confirming anecdotal evidence that many highly multinational firms do not hedge with derivatives. We find that operational hedging and financial hedging are significantly inversely related to firms foreign exchange exposure, providing evidence that the two hedging techniques are complementary for all but the most highly operationally hedged firms. By comparing our findings for 1999-2006 with 1999-2009, we show that this complementarity breaks down when exchange rate volatility is high - as the effectiveness of financial hedging diminishes. An important message for firms is that operational hedges work, and they potentially provide better protection than financial hedging during times of stress.",
    author = "Hutson, {Elaine Robyn} and Elaine Laing",
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    doi = "10.1016/j.jbankfin.2014.03.002",
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    Foreign exchange exposure and multinationality. / Hutson, Elaine Robyn; Laing, Elaine.

    In: Journal of Banking and Finance, Vol. 43, 2014, p. 97 - 113.

    Research output: Contribution to journalArticleResearchpeer-review

    TY - JOUR

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    AU - Hutson, Elaine Robyn

    AU - Laing, Elaine

    PY - 2014

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    AB - We examine the relation between firms foreign exchange exposure and the extent of their multinationality as a proxy for operational hedging. Using a sample of 953 US firms over the period 1999?2006, we show that there is a nonlinear relation between operational and financial hedging, confirming anecdotal evidence that many highly multinational firms do not hedge with derivatives. We find that operational hedging and financial hedging are significantly inversely related to firms foreign exchange exposure, providing evidence that the two hedging techniques are complementary for all but the most highly operationally hedged firms. By comparing our findings for 1999-2006 with 1999-2009, we show that this complementarity breaks down when exchange rate volatility is high - as the effectiveness of financial hedging diminishes. An important message for firms is that operational hedges work, and they potentially provide better protection than financial hedging during times of stress.

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