Exchange rate risk management : evidence from East Asia / Leora F. Klapper, George Allayannis, Gregory W. Brown.

Format:

Book

Author/Creator:

Klapper, Leora, author.

Brown, Gregory, author.

Allayannis, George, author.

Series:

Policy research working papers ; 2606.

Policy research working papers ; 2606

Language:

English

Subjects (All):

Risk management.

Physical Description:

1 online resource.

Other Title:

Policy research working paper vol. 2606

Place of Publication:

Washington, Distict of Columbia : World Bank, 2000.

Summary:

(May 2001) In a large sample of East Asian nonfinancial corporations, firms using foreign currency derivatives had distinctive characteristics, such as larger size and foreign debt exposures. Unlike in studies of U.S. firms, there was only weak evidence that liquidity-constrained firms with greater growth opportunities hedged more. Firms appeared to use foreign earnings as a substitute for hedging with derivatives, and to engage in "selective" hedging. There was no evidence that East Asian firms eliminated their foreign exchange exposure by using derivatives. And firms using derivatives before the crisis performed just as poorly as nonhedgers during the crisis. 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. Allayannis, Brown, and Klapper 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 important in the use of foreign currency derivatives. Unlike studies of U.S. 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. This paper-a product of Finance, Development Research Group-is part of a larger effort in the group to study corporate finance and risk management. The authors may be contacted at allayannisy@darden.virginia.edu, gregwbrown@unc.edu, or lklapper@worldbank.org.

Notes:

Description based on publisher supplied metadata and other sources.

Publisher Number:

10.1596/1813-9450-2606