Framework for evaluating foreign exchange exposure management practices of non-financial companies: A managerial approach

Abstract

Foreign currencies are an integral part of doing international business. Their role is often accepted as a necessity, while the significance of the risks associated with uncertain future exchange rates is dismissed. Previous studies have shown that actively managing foreign exchange (FX) exposure can be beneficial. Few studies, however, have comprehensively explored how to manage FX exposure. The purpose of this study is to examine the FX exposure management practices of non-financial companies involved in international business and ultimately to evaluate their practices.

This study contributes to existing literature by outlining a framework for FX exposure management. Previous studies have been content to conclude FX management practices to vary significantly across companies, but this study asserts that sufficient similarities do exist for identifying common developmental paths. Identifying them enables evaluation and comparison of FX exposure management practices between companies. For managers the study includes a tool for self-evaluation and benchmarking purposes.

The empirical part of the study gives an overview of the prevailing FX exposure management practices in Finnish non-financial companies. For the empirical part an online survey was conducted in between December 2010 and January 2011. 1110 Finnish non-financial companies were asked to participate out of which 86 applicable responses were received. This constituted overall a 7,7 % response rate.

The results of the survey study showed that company size, quantity of FX exposure and the number of foreign currencies used by a company in its operations have positive relationships with the sophistication of prevailing FX exposure management practices. Still the study found that there are significant variations in managing practices of companies with similar FX exposure profiles. Overall performance evaluation was the most neglected component of FX exposure management.