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Korean Journal of Financial Studies 2011;40(5):829-861.
Published online December 31, 2011.
On the Effectiveness of Foreign Exchange Rate Exposure Hedging with Derivatives for Korean Industrial Companies
Taek Ho Kwon, Rae Soo Park, Sung C. Bae
한국 제조기업의 환노출과 파생상품을 이용한 헤지
권택호, 박래수, 배성철
Abstract
This study examines the effects of hedging activities of Korean firms on their exchange rate exposure by separately measuring expected exchange rate exposure (which reflects the firms` basic operating activities) and observed exchange rate exposure (which reflects the firms` hedging activities as well). The results show that firms with positive expected exchange rate exposure reduce their exposure through selling of currency futures/forwards, internal transactions with foreign subsidiaries, and issuance of foreign currency denominated debt. In contrast, firms with negative expected exchange rate exposure reduce their exposure only through transfer pricing associated with exchange rate changes. Our analysis of firms with significant observed exchange rate exposure offers evidence that structured currency forwards contracts deteriorate firms` exchange rate exposure. Our results further show that the effects of firms` hedging activities using financial market products vary significantly depending on the relation between product market and financial market with respect to the market response to exchange rate changes. In particular, a sudden change in exchange rates alters the established relation between product market and financial market, leading to a different outcome of hedging activities using derivatives than expected before the change in exchange rates. The overall results of this study suggest that for the effective management of exchange rate exposure firms would need to understand both the underlying characteristics of exchange rate exposure and the plausible conditions in the product market that they may face before they engage in derivatives transactions.
Key Words: 가격전가,관찰환노출,예측환노출,파생상품거래 헤징,환노출관리,Eexpected Exchange Rate Exposure,Foreign Exchange Exposure Management,Hedging with Derivatives,Observed Exchange Rate Exposure,Pass-through
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