Managing foreign exchange risk with derivatives

This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), a US-based manufacturer of durable equipment. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3,110 foreign-exchange derivative transactions. Informational asymmetries, facilitation of internal contracting, and competitive pricing concerns appear to motivate why the firm hedges. How HDG hedges depends on accounting treatment, derivative market liquidity, exchange rate volatility, exposure volatility, and recent hedging outcomes. (C) 2001 Elsevier Science S.A. All rights reserved.