An investigation of foreign exchange risk management by exporting small and medium sized enterprises

<p>Previous studies on foreign exchange (forex) risk management have tended to focus on multinational enterprises; while how SMEs manage their forex risk is still largely unexplored. As small and medium sized enterprises (SMEs) are increasingly involved in international markets, they have become a new research setting on forex risk management. Given that SMEs have limited access to resources, skills and capabilities, internal hedging techniques could be favoured by SMEs. There is limited research on this matter, and the extant literature on forex management generally considers derivatives as major hedging techniques for large firms. This thesis primarily investigates how exporting SMEs manage forex risk. In addition, approaches to forex management could be changed as a firm becomes more experienced internationally. Following the basic principles of internationalisation theory, the thesis also examines the impact of the internationalisation degree of the firm on forex management decisions. This thesis sheds new light on SMEs’ hedging practices by providing a better understanding of SMEs’ choices of forex risk management. Three research questions have been raised: (1) what determinants influence SMEs’ choice to hedge as a way of managing forex risk; (2) what strategies do SMEs use when they choose hedging to manage forex exposure; and (3) how does the degree of internationalisation impact the choice of forex management. The thesis draws on two theoretical perspectives to help address these overarching questions. It extends the use of the resource-based view (RBV), and combines this with internationalisation theory. The setting of SMEs is a context for using the RBV. New Zealand and Australian exporting SMEs provide the sample for testing the hypotheses. The contributions of this thesis are twofold. Firstly, the thesis identifies four determinants of forex risk strategy by exporting SMEs, i.e. degree of internationalisation (specifically, export ratio), forex exposure, perceived forex risk, and resources. Secondly, it extends the use of the RBV and the internationalisation theory in forex risk management of SMEs. In addition, the thesis uses a research approach combining an exploratory qualitative study and a main quantitative study.</p>

An investigation of foreign exchange risk management by exporting small and medium sized enterprises

<p>Previous studies on foreign exchange (forex) risk management have tended to focus on multinational enterprises; while how SMEs manage their forex risk is still largely unexplored. As small and medium sized enterprises (SMEs) are increasingly involved in international markets, they have become a new research setting on forex risk management. Given that SMEs have limited access to resources, skills and capabilities, internal hedging techniques could be favoured by SMEs. There is limited research on this matter, and the extant literature on forex management generally considers derivatives as major hedging techniques for large firms. This thesis primarily investigates how exporting SMEs manage forex risk. In addition, approaches to forex management could be changed as a firm becomes more experienced internationally. Following the basic principles of internationalisation theory, the thesis also examines the impact of the internationalisation degree of the firm on forex management decisions. This thesis sheds new light on SMEs’ hedging practices by providing a better understanding of SMEs’ choices of forex risk management. Three research questions have been raised: (1) what determinants influence SMEs’ choice to hedge as a way of managing forex risk; (2) what strategies do SMEs use when they choose hedging to manage forex exposure; and (3) how does the degree of internationalisation impact the choice of forex management. The thesis draws on two theoretical perspectives to help address these overarching questions. It extends the use of the resource-based view (RBV), and combines this with internationalisation theory. The setting of SMEs is a context for using the RBV. New Zealand and Australian exporting SMEs provide the sample for testing the hypotheses. The contributions of this thesis are twofold. Firstly, the thesis identifies four determinants of forex risk strategy by exporting SMEs, i.e. degree of internationalisation (specifically, export ratio), forex exposure, perceived forex risk, and resources. Secondly, it extends the use of the RBV and the internationalisation theory in forex risk management of SMEs. In addition, the thesis uses a research approach combining an exploratory qualitative study and a main quantitative study.</p>

The Structured Hedging of Financial Value: With Applications to Foreign Exchange Risk Management

<p>The objective of the thesis is to develop a structured financial hedging framework that is empirically implementable and consistent with a corporate finance perspective. Value at risk provides a suitable framework for this purpose. The aversion implied in the value at risk and its generalised theory arises from a firm's concerns about contingent financial distress costs, which can be considered as the payoff of a put option written by stockholders of firms in favour of third parties. This enables the development of a hedging framework to explore how a firm's welfare might be enhanced by replacing natural exposures with hedged outcomes. An ideal hedging decision is to maximise the financial value in good times at minimal cost in terms of the generalised value at risk penalty function. In an efficient market, a fully hedged policy using forwards is generally the optimal decision, while alternatives should be taken into account where markets are not efficient. In such cases, the underlying empirical methodology should be able to detect inefficiencies and feed into the objective functions for maximising firm value. The empirical implementation is explored with a variety of econometric methodologies. These include the development of new semi-parametric or nonparametric techniques based upon wavelet analysis, as well as an incomplete forecasting algorithm. Such methods have been preferred to classical linear and stationary models, because they have broader application in an inefficient market where information is technically fuzzy and financial data may exhibit non-linearity or non-stationarity. Further decision dimensions concern exposure duration or path risk, in which individuals' perspectives of risk is time-dependent and linked to the evolution of value at risk through time. The proposed approaches find their main application in foreign exchange risk management, a topic of considerable importance and sensitivity in New Zealand. A statistically well-adapted hedge object for an exporter such as the dairy industry is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. Further applications are to strategic fund management where the objective is to derive optimal foreign exchange forwards based hedges.</p>

The Structured Hedging of Financial Value: With Applications to Foreign Exchange Risk Management

<p>The objective of the thesis is to develop a structured financial hedging framework that is empirically implementable and consistent with a corporate finance perspective. Value at risk provides a suitable framework for this purpose. The aversion implied in the value at risk and its generalised theory arises from a firm's concerns about contingent financial distress costs, which can be considered as the payoff of a put option written by stockholders of firms in favour of third parties. This enables the development of a hedging framework to explore how a firm's welfare might be enhanced by replacing natural exposures with hedged outcomes. An ideal hedging decision is to maximise the financial value in good times at minimal cost in terms of the generalised value at risk penalty function. In an efficient market, a fully hedged policy using forwards is generally the optimal decision, while alternatives should be taken into account where markets are not efficient. In such cases, the underlying empirical methodology should be able to detect inefficiencies and feed into the objective functions for maximising firm value. The empirical implementation is explored with a variety of econometric methodologies. These include the development of new semi-parametric or nonparametric techniques based upon wavelet analysis, as well as an incomplete forecasting algorithm. Such methods have been preferred to classical linear and stationary models, because they have broader application in an inefficient market where information is technically fuzzy and financial data may exhibit non-linearity or non-stationarity. Further decision dimensions concern exposure duration or path risk, in which individuals' perspectives of risk is time-dependent and linked to the evolution of value at risk through time. The proposed approaches find their main application in foreign exchange risk management, a topic of considerable importance and sensitivity in New Zealand. A statistically well-adapted hedge object for an exporter such as the dairy industry is the corporate terms of trade, which balances up output and expense prices as a single index related to the net profit margin. Further applications are to strategic fund management where the objective is to derive optimal foreign exchange forwards based hedges.</p>

Financial Instruments to Address Renewable Energy Project Risks in India

This paper provides a summary of financial instruments to address two biggest risks to renewable projects in India. These risks include the following: first, off-taker (or counterparty) risk, which relates to payment delays by public-sector distribution companies to independent power producers, which then impact project level cash flows in the domestic currency; second, currency (or foreign exchange) risk related to currency fluctuations, which impact foreign investor level cash flows in foreign currencies. This paper then describes multiple solutions for each of these risks, using public funding mechanisms. For payment delays, the category of solutions is termed Payment Security Mechanisms; whereas, for currency fluctuations, the category of solutions is termed Foreign Exchange Hedging Facilities. The coverage in this paper shows the evolution of the solutions from theory to practice over time. These solutions are likely to be applicable to other developing countries.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.

The Peculiarities of Foreign Exchange and Insurance Markets

Foreign exchange risk is one of the most important components of the financial market. Like any other financial risk, it can be managed or avoided. Financial risk management requires the relevant knowledge and resources and only specialized financial institutions are engaged in doing so. Thee commercial banks do not accept foreign exchange risks, their assets and liabilities are denominated in the same currency. Therefore, it is recommended for households and businesses to avoid the currency risk. People's behavior is different during the sharp fluctuations of exchange rates. There is no ideal tactic for behavior. However, we would like to share some basic tips to help you reduce your expected financial risks; At the same time, the undesirable attitude characteristic of the period of strong fluctuations in the course will become clearer and more preventive. We hope that the information presented in such circumstances will help you to make the right decision. Keywords: Foreign exchange and insurance market efficiency; Exchange rate risk insurance; Involvement of financial instruments.