Determinants Of Foreign Currency Hedging Essay
In this chapter, previous literature concerns with the determinants of foreign currency hedging will be discussed and assessed.
Theories for the determinants of foreign currency hedging can be evaluated from two aspects: the level of foreign exchange exposure and how firm’s value will be affected; what kinds of characteristics for the firm influence its decisions for hedging. I will discuss the determinants of foreign currency hedging from this two points of view in the following sections.
Multinational corporations (MNCs) involve in foreign currency hedging activities because of their foreign exposures will have an impact on its expected cash flows. The determinants of foreign currency exposure should be consistent with factors affecting FX hedging such as foreign operations, firm size and the fluctuations of stock returns. In addition, to what extent will the foreign exchange rate exposure changes firm value is an important area to research since it should be the root of cause for hedging.
Maximizing shareholder’s equity is the primary target for all the managerial activities as well as risk management, it is consistent with stabilizing firm value. The theories of risk management have been developing for a long period, the aims for hedging is changing over time. Modigliani and Miller (1958) argue that hedging do not change the real value of firms in a perfect capital market, but Sultz (1996) state that hedging reduces the cost of financial distress to…