Why FX Risk Management Is Broken–and What Boards Need to Know to Fix It

Jankensgård, Håkan; Alviniussen, Alf; Oxelheim, Lars

doi:10.1111/jacf.12158

Cited by 6 publications

(2 citation statements)

References 19 publications

(23 reference statements)

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“…We compute the variable Labor Intensity as the number of employees divided by total sales in million USD, based on data retrieved from Bloomberg. Prior research outlines the importance of corporate governance for managing exchange‐rate uncertainty (Aretz & Bartram, 2010; Jankensgård, Alviniussen, & Oxelheim, 2016; Lel, 2012). We use data on board of directors meetings per year (variable name: Board Meetings ) from BoardEx to control for the impact of the board of director's governance on the effectiveness of corporate risk management (Payne, Benson, & Finegold, 2009; Vafeas, 1999; Xie, Davidson, & DaDalt, 2003).…”

Section: Methodsmentioning

confidence: 99%

Financial hedging and operational flexibility as instruments to manage exchange‐rate uncertainty in multinational corporations

Fisch

Puhr

2021

Global Strategy Journal

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Research Summary Literature that compares the advantages of financial hedging and operational flexibility as instruments to manage exchange‐rate uncertainty presents inconsistent results. This study addresses such inconsistencies in two ways. First, it clarifies that the effects of financial hedging and operational flexibility are asymmetric. Financial hedging helps an MNC to reduce a negative effect of exchange‐rate uncertainty on firm value, whereas operational flexibility allows an MNC to enhance a positive effect of exchange‐rate uncertainty on firm value. Second, the study demonstrates that these effects are contextual to the MNC's subsidiary network. Depending on whether exchange‐rate correlation in the subsidiary network is positive or negative, either financial hedging or operational flexibility is more effective than the other. Regressions on a sample of U.S. manufacturing firms support the predictions. Managerial Summary Multinational corporations face exchange‐rate fluctuations in their subsidiary networks as a source of substantial uncertainty. MNCs can manage this uncertainty using financial hedging and operational flexibility. However, the literature is inconclusive on whether MNCs can use both instruments in equal measure. This study clarifies that financial hedging allows MNCs to limit negative consequences of exchange‐rate uncertainty on their stock‐market valuations. Operational flexibility, by contrast, gives MNCs the opportunity to exploit exchange‐rate uncertainty and thereby to enhance their firm value. In addition, the study proposes that the effectiveness of financial hedging and operational flexibility depends on the individual MNC's subsidiary network configuration. Based on these findings, MNCs can identify the effective instrument for managing exchange‐rate uncertainty.

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Section: Methodsmentioning

confidence: 99%

Financial hedging and operational flexibility as instruments to manage exchange‐rate uncertainty in multinational corporations

Fisch

Puhr

2021

Global Strategy Journal

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“…As a result of some experts already argue for more "non-statistical ways thinking about risk" (Best, 2010;The Economist, 2008;Chen et al, 2016). Companies from outside the US relying on oil, for example, do not only have to hedge the oil price itself but also as oil is priced in US-dollar they have to hedge currencies at the same time maybe disregarding the interaction of the US-dollar against other currencies and the oil price (Jackson, 2010; for other examples see The Economist, 2008 andJankensgard et al, 2016).…”

Section: Knowledge Is Powermentioning

confidence: 99%

Knowledge is power – conceptualizing collaborative financial risk assessment

Brunner-Kirchmair

Wiener

2019

JRF

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Purpose Inspired by new findings on and perceptions of risk governance, such as the necessity of taking a broader perspective in coping with risks in companies and working together in interactive groups with various stakeholders to deal with complex risks in the modern world, the purpose of this paper is looking for new ways to deal with financial risks. Current methods dealing with those risks are confronted with the problems of being primarily based on past data and experience, neglecting the need for objectivity, focusing on the short-term future and disregarding the interconnectedness of different financial risk categories. Design/methodology/approach A literature review of risk governance, financial risk management and open foresight was executed to conceptualize solutions to the mentioned-above problems. Findings Collaborative financial risk assessment (CFRA) is a promising approach in financial risk governance with respect to overcoming said problems. It is a method of risk identification and assessment, which combines aspects of “open foresight” and the financial risk management and governance literature. CFRA is characterized as bringing together members of different companies in trying to detect weak signals and trends to gain knowledge about the future, which helps companies to reduce financial risks and increase the chance of gaining economic value. By overcoming organizational boundaries, individual companies may gain the knowledge they would probably not have without CFRA and achieve a competitive advantage. Research limitations/implications A conceptual paper like the one at hand wants empirical proof. Therefore, the authors developed a research agenda in the form of five propositions for further research. Originality/value This paper discusses the existing problems of financial risk identification and assessment methods. It contributes to the existing literature by proposing CFRA as a solution to those problems and adding a new perspective to financial risk governance.

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Net Income Exposure to FX

2020

Corporate Foreign Exchange Risk Management

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Why FX Risk Management Is Broken–and What Boards Need to Know to Fix It

Cited by 6 publications

References 19 publications

Financial hedging and operational flexibility as instruments to manage exchange‐rate uncertainty in multinational corporations

Financial hedging and operational flexibility as instruments to manage exchange‐rate uncertainty in multinational corporations

Knowledge is power – conceptualizing collaborative financial risk assessment

Net Income Exposure to FX

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