This paper draws on Vontobel (1996). We would like to thank the participants of the LIFE and Journal of Empirical Finance conference on Risk Management in Portugal and the discussant Willem Verschoor. We are also indebted to the seminar participants at the Stockholm School of Economics and at the 7 th Finance Workshop of the Studiengruppe für Finanzmarktforschung. We further benefited from the comments of Manuel Ammann, Didier Cossin, John McConnell, Urs Peyer, Dennis Sheehan, Heinz Zimmermann, and, especially, René Stulz. We are also grateful to Petra Jörg and Pius Zgraggen for their generous help, and to Stefan Reusser for computational assistance.page 2 Firms, do you know your currency risk exposure?Survey results AbstractThis paper surveys the currency risk management practices of Swiss industrial corporations. We find that industrials do not quantify their currency risk exposure and investigate possible reasons. One possibility is that firms do not think they need to know because they use on-balance-sheet instruments to protect themselves before and after currency rates reach troublesome levels. This is puzzling because a rough estimate of at least cash flow exposure is not a prohibitive task and could be helpful. It is also puzzling that firms use currency derivatives to hedge/insure individual short-term transactions, without apparently trying to estimate aggregate transaction exposure.page 3 Firms, do you know your currency risk exposure? Survey resultsThis paper surveys the currency risk management practices of Swiss industrial corporations. Many of them sell most of their output abroad and would therefore seem to be heavily exposed to currency risk.In fact, currency risk can be substantial. Between 1978 and Swiss franc experienced dramatic swings in relation to major currencies such as the U.S. dollar, the Italian lira, and the British pound. Comparing highest and lowest exchange-rate levels, the U.S. dollar depreciated by 60% vis-à-vis the Swiss franc, the Italian lira by 70%, and the British pound by 62%. Moreover, although not as high as those observed in the equity markets, annual currency rate volatilities can be sizable-in the past six years or so, the volatility of the U.S. dollar, for example, has exceeded 12%. The purpose of this study is to examine whether industrials quantify their risk profile.Risk management can benefit shareholders because of various concavities in the risk profile of firm value [Stulz (1984), Smith and Stulz (1985), Froot, Scharfstein, and Stein (1993), ]. Such a risk profile (RP) maps firm value against unexpected changes in a specific output price or factor cost. RP concavities are brought about by, among other things, direct costs of financial default, transaction costs of outside funding, asymmetries of information between managers and investors, moral hazard, "firm-specific investments" of noninvestor groups such as managers, employees, customers, and suppliers, and convex tax schedules.Accordingly, unfavorable states of the world reduce firm value by more than favo...
This paper draws on Vontobel (1996). We would like to thank the participants of the LIFE and Journal of Empirical Finance conference on Risk Management in Portugal and the discussant Willem Verschoor. We are also indebted to the seminar participants at the Stockholm School of Economics and at the 7 th Finance Workshop of the Studiengruppe für Finanzmarktforschung. We further benefited from the comments of Manuel Ammann, Didier Cossin, John McConnell, Urs Peyer, Dennis Sheehan, Heinz Zimmermann, and, especially, René Stulz. We are also grateful to Petra Jörg and Pius Zgraggen for their generous help, and to Stefan Reusser for computational assistance.page 2 Firms, do you know your currency risk exposure?Survey results AbstractThis paper surveys the currency risk management practices of Swiss industrial corporations. We find that industrials do not quantify their currency risk exposure and investigate possible reasons. One possibility is that firms do not think they need to know because they use on-balance-sheet instruments to protect themselves before and after currency rates reach troublesome levels. This is puzzling because a rough estimate of at least cash flow exposure is not a prohibitive task and could be helpful. It is also puzzling that firms use currency derivatives to hedge/insure individual short-term transactions, without apparently trying to estimate aggregate transaction exposure.page 3 Firms, do you know your currency risk exposure? Survey resultsThis paper surveys the currency risk management practices of Swiss industrial corporations. Many of them sell most of their output abroad and would therefore seem to be heavily exposed to currency risk.In fact, currency risk can be substantial. Between 1978 and Swiss franc experienced dramatic swings in relation to major currencies such as the U.S. dollar, the Italian lira, and the British pound. Comparing highest and lowest exchange-rate levels, the U.S. dollar depreciated by 60% vis-à-vis the Swiss franc, the Italian lira by 70%, and the British pound by 62%. Moreover, although not as high as those observed in the equity markets, annual currency rate volatilities can be sizable-in the past six years or so, the volatility of the U.S. dollar, for example, has exceeded 12%. The purpose of this study is to examine whether industrials quantify their risk profile.Risk management can benefit shareholders because of various concavities in the risk profile of firm value [Stulz (1984), Smith and Stulz (1985), Froot, Scharfstein, and Stein (1993), ]. Such a risk profile (RP) maps firm value against unexpected changes in a specific output price or factor cost. RP concavities are brought about by, among other things, direct costs of financial default, transaction costs of outside funding, asymmetries of information between managers and investors, moral hazard, "firm-specific investments" of noninvestor groups such as managers, employees, customers, and suppliers, and convex tax schedules.Accordingly, unfavorable states of the world reduce firm value by more than favo...
Almost everyone agrees that equity-based incentive compensation can play an important role in increasing shareholder value, but there is considerable disagreement as to what that role should be and how equity pay should be packaged. What's more, there has been a backlash against equity pay that has compensation committees, investors, and corporate watchdogs on full alert. The authors of this article provide some basic guidelines for equity pay that could help to restore confidence in this useful element of compensation-guidelines that encompass the type of equity instrument, the level of equity-based pay, the extent to which equity pay is performance based, and the structure of the equity package in terms of vesting, exercise, and expiry. They start by acknowledging that the role of equity pay is limited by the extent to which shareholder value can be affected by the manager in question. They recommend building steadily to a constant level of stock price exposure and then gradually reducing this level after retirement. For most companies, equity-based pay should be significant only for a handful of employees; performance based cash bonuses provide better "line-of-sight," especially for operating managers who are somewhat removed from corporate-wide decisions. And disclosure-both internal and external-is perhaps the most important aspect of equity-based pay plans. 2004 Morgan Stanley.
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