Is operational hedging a substitute for or a complement to financial hedging?

Internationalization and exposure to foreign currency risk: An examination of lodging firms

“…Allayannis and Weston (2001) found that operational diversification leads to increased exposure to exchange rate risk, while Pantzalis et al (2001) and Kim et al (2006) reported a significant hedging effect from operational diversification. The discrepancy in these results is underscored by the sample firms in these studies.…”

“…The effect, widely cited as "operational hedging" (Kim et al, 2006), is grounded in the concept that exposure to risk from respective currencies will be reduced by adding more currencies to a firm's revenue portfolio, given that the currencies do not have unity covariance.…”

“…Allayannis and Weston (2001) included all CRSP firms with foreign subsidiaries, while Pantzalis et al (2001) and Kim et al (2006) restricted their sample to firms that were already well diversified. Pantzalis et al (2001) used Fortune 500 firms, while Kim et al (2006) sampled firms with total sales of $300 million or more. The sampled firms of the two studies, on average, operated in approximately 6 and 7 foreign countries, respectively.…”

Corporate Cash Flow and Stock Price Exposures to Foreign Exchange Rate Risk

“…At the 9 8 Firms use various forms of hedging, such as pass-through, financial hedging (e.g. foreign currency debt and foreign currency derivatives) and operational hedging to reduce their exposures to exchange rate risk (Allayannis and Ofek, 2001;Kim et al, 2006). In the presence of capital market imperfections (e.g.…”

“…costly bankruptcy, taxes, underinvestment problems), hedging activities at the firm level can increase shareholder value (Kim et al, 2006;Deshmukh and Vogt, 2005;Nelson et al 2005;Spanò, 2004;Haushalter et al, 2002).…”