Foriegn Exchange Exposure Evidence from France
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- Date Submitted: 01/27/2011 07:27 PM
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ASYMMETRIC FOREIGN CURRENCY EXPOSURES AND DERIVATIVES USE: EVIDENCE FROM FRANCE Ephraim Clarka, Salma Meftehb∗
a
Middlesex Business School, Lille Graduate School of Management Research Center
b
ESSCA Business School, 1 rue Lakanal, 49003, Angers and Paris-Dauphine University, 75775 Paris, FRANCE.
∗
Corresponding author. Tel: +33 (0)2 41 73 47 39; Fax: +33 (0)2 41 73 47 45; E-mail: Salma.Mefteh@essca.fr
1
ABSTRACT This paper provides evidence on the asymmetric sensitivity of stock returns of French firms to exchange rate risk and the effect of FC derivative use in alleviating this risk. The results show that exposure is frequently asymmetric and asymmetric exposure is sensitive to different currency exposures. Cross sectional analysis provides evidence that FC derivatives use has a significant effect on reducing FC exposure levels. This effect is sensitive to the hedging strategy and it varies with respect to different currencies.
Keywords: Foreign currency exposure, Foreign currency hedging, Derivatives, Firm value. JEL Classification: F31; G32.
2
1. INTRODUCTION Corporate use of derivatives to hedge foreign currency exposure has become standard practice for firms with foreign operations or commercial interests.1 The conception and implementation of a FC hedging strategy requires a commitment of financial, physical and human resources that can represent significant costs for the firm. According to the positive theory of corporate hedging developed by Smith and Stulz (1985), these costs can be justified only if imperfect capital markets create conditions where corporate hedging reduces exposure and adds value to the firm. The key question for shareholders, then, is whether hedging does, in fact, reduce exposure and add value to the firm. Given the complex relationships between exchange rates and other economic factors, such as relative prices, income, expenditure, interest rates, supply and demand, to mention only a few, designing...
a
Middlesex Business School, Lille Graduate School of Management Research Center
b
ESSCA Business School, 1 rue Lakanal, 49003, Angers and Paris-Dauphine University, 75775 Paris, FRANCE.
∗
Corresponding author. Tel: +33 (0)2 41 73 47 39; Fax: +33 (0)2 41 73 47 45; E-mail: Salma.Mefteh@essca.fr
1
ABSTRACT This paper provides evidence on the asymmetric sensitivity of stock returns of French firms to exchange rate risk and the effect of FC derivative use in alleviating this risk. The results show that exposure is frequently asymmetric and asymmetric exposure is sensitive to different currency exposures. Cross sectional analysis provides evidence that FC derivatives use has a significant effect on reducing FC exposure levels. This effect is sensitive to the hedging strategy and it varies with respect to different currencies.
Keywords: Foreign currency exposure, Foreign currency hedging, Derivatives, Firm value. JEL Classification: F31; G32.
2
1. INTRODUCTION Corporate use of derivatives to hedge foreign currency exposure has become standard practice for firms with foreign operations or commercial interests.1 The conception and implementation of a FC hedging strategy requires a commitment of financial, physical and human resources that can represent significant costs for the firm. According to the positive theory of corporate hedging developed by Smith and Stulz (1985), these costs can be justified only if imperfect capital markets create conditions where corporate hedging reduces exposure and adds value to the firm. The key question for shareholders, then, is whether hedging does, in fact, reduce exposure and add value to the firm. Given the complex relationships between exchange rates and other economic factors, such as relative prices, income, expenditure, interest rates, supply and demand, to mention only a few, designing...