Exchange Rate Risk Management : Evidence from East Asia
The recent East Asian financial crisis provides a natural experiment for investigating foreign exchange risk management by nonfinancial corporations. During this period, the financial crisis exposed local firms to large depreciations in exchange ra...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/05/1121294/exchange-rate-risk-management-evidence-east-asia http://hdl.handle.net/10986/19655 |
| Summary: | The recent East Asian financial crisis
provides a natural experiment for investigating foreign
exchange risk management by nonfinancial corporations.
During this period, the financial crisis exposed local firms
to large depreciations in exchange rates and reduced access
to foreign capital. The authors explore the exchange rate
hedging practices of firms that hedged exposure to foreign
debt in eight East Asian countries between 1996 and 1998.
They identify and characterize East Asian companies that
used foreign currency derivatives, documenting differences
in size, financial characteristics, and exposure to domestic
and foreign debt. They investigate the factors improtant in
the use of foreign currency derivatives. Unlike studies of
US firms, they find limited support for existing theories of
optimal hedging. Instead, they find that firms use foreign
earnings as a substitute for hedging with derivatives. And
they find evidence that firms engage in
"selective" hedging. They investigate the relative
performance of hedgers during and after the crisis. They
find no evidence that East Asian firms eliminated their
foreign exchange exposure by using derivatives. Firms that
used derivatives before the crisis performed just as poorly
as nonhedgers during the crisis. After the crisis, firms
that hedged performed somewhat better than nonhedgers, but
this result appears to be explained by a larger post-crisis
currency exposure for hedgers (an exchange rate risk
premium), which had limited access to derivatives during
this period. |
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