Using Derivatives to Hedge Foreign Exchange Exposure in Russia: Academic Research Review

Abstract

The review analyzes Russian academic publications from the early 2000s to the present on financial derivatives and their use by Russian non-financial companies to hedge foreign exchange exposure. During this period, studies have made significant progress, from discussing general issues, like the concept of FX exposure, the types of derivatives and the basics of hedging, to original research of hedging effects on company value or cost of equity using generally accepted quantitative methods, such as VaR evaluation. The research demonstrates that hedging practices vary by industry and by the firm size; the 2008 and 2014 financial crises followed by increased FX volatility had a twofold effect on these practices, with somecompanies starting to apply hedging on a larger scale, and others abandoning it at all. The general opinion is that the use of derivatives to hedge foreign exchange exposure, specifically the transaction one, in Russia is much lower than in developed markets due to the market immaturity, regulatory and accounting difficulties, low demand for hedging instruments because of underdeveloped corporate treasury function, high hedging costs, etc. Instead, companies adhere to natural hedging, use non-financial techniques, or accept foreign exchange exposure. Still, most authors agree that to manage FX exposure, companies need to develop a comprehensive strategy; however, commercial flows reorientation due to the current political and economic situation requires developing new FX derivatives and a market for them. Overall, it can be concluded that the studies of Russian practices of using financial derivatives to hedge foreign exchange exposure are relatively small in number compared to foreign ones; data availability limits their factual base to information disclosed by public companies and model examples and does not allow to consider mid-sized and private firms’ practices.