Foreign Currency Risk Management Practices In U.S. Multinationals

Abstract

Todays multinational companies face potentially significant economic exposure to changing exchange rates. One way to manage such currency risk is through the use of foreign exchange derivatives. This paper examines how foreign exchange derivatives are used by U.S. multinationals. Recent studies report that the use of foreign exchange derivatives varies across U.S. multinationals and may depend on a variety of influences, including industry membership. We develop a model to explain these variations in the amounts of derivatives used in terms of differences in foreign currency exposure. The results are consistent with our expectations. In particular, the evidenced pertaining to a sample of 654 U.S. multinationals for the 1990-1994 period indicates that the notional amounts of foreign exchange derivatives are positively associated with the degree of foreign involvement, which proxies foreign currency exposure. Moreover, the results are not sensitive to industry membership or other interfirm differences. The findings of this paper are important because they contribute to a better understanding of the foreign currency risk management practices in U.S. multinationals.