Management

EXCHANGE RATE RISK MEASUREMENT AND MANAGEMENT: ISSUES AND APPROACHES FOR FIRMS

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Abstract
Measuring and managing exchange rate risk exposure is important for reducing a
firm’s vulnerabilities from major exchange rate movements, which could adversely
affect profit margins and the value of assets. This paper reviews the traditional
types of exchange rate risk faced by firms, namely transaction, translation and
economic risks, presents the VaR approach as the currently predominant method
of measuring a firm’s exchange rate risk exposure, and examines the main advantages
and disadvantages of various exchange rate risk management strategies,
including tactical vs. strategical and passive vs. active hedging. In addition,
it outlines a set of widely-accepted best practices in managing currency risk and
presents some of the main hedging instruments in the OTC and exchange-traded
markets. The paper also provides some data on the use of financial derivatives
instruments, and hedging practices by US firms

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: .,

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1-18

Language

English

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NONE

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EXCHANGE RATE RISK MEASUREMENT AND MANAGEMENT: ISS

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