Management of Foreign Exchange Risk: A Review Article

This paper reviews the literature on Foreign Exchange Risk Management (FERM) which has burgeoned during the last decade. Scholars' and practioners' emerging interest in Foreign Exchange Risk Management was spurred by the advent of fluctuating exchange rates in the early seventies as well as by the pronouncement of the infamous FASB Statement No. 8 in 1976 which laid down unambiguous guidelines for consolidating financial statements of multinational corporations. A normative (rather than a market) view of Foreign Exchange Risk Management is taken and accordingly the author reviews first the two key informational inputs necessary for any Foreign Exchange Risk Management program: forecasting exchange rates and measuring exposure to exchange risk. Available decision models for handling transaction and translation exposures are reviewed next. A concluding section identifies gaps in the existing literature and suggests directions for future research.

[1]  J. McCulloch,et al.  Operational Aspects of the Siegel Paradox , 1975 .

[2]  J. Dietrich,et al.  The Efficiency of the Market for Foreign Exchange under Floating Exchange Rates , 1978 .

[3]  Thomas G. Evans,et al.  The impact of statement of financial accounting standards no. 8 on the foreign exchange risk management practices of American multinationals : an economic impact study , 1978 .

[4]  W. Folks.  DECISION ANALYSIS FOR EXCHANGE RISK MANAGEMENT , 1972 .

[5]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[6]  M. Eaker.  Denomination Decision for Multinational Transactions , 1980 .

[7]  N. Biger.  Exchange Risk Implications of International Portfolio Diversification , 1979 .

[8]  S. Goodman.  Foreign Exchange Rate Forecasting Techniques: Implications for Business and Policy , 1979 .

[9]  W. P. Culbertson.  Purchasing Power Parity and Black-Market Exchange Rates , 1975 .

[10]  George S. Oldfield,et al.  Managing Foreign Assets When Foreign Exchange Markets Are Efficient , 1977 .

[11]  The Use of Discriminant Analysis in Forecasting Exchange Rate Movements , 1975 .

[12]  D. G. Heckerman.  The Exchange Risks of Foreign Operations , 1972 .

[13]  Bruno Solnik.  THE INTERNATIONAL PRICING OF RISK: AN EMPIRICAL INVESTIGATION OF THE WORLD CAPITAL MARKET STRUCTURE , 1974 .

[14]  S. Kohlhagen..  A Model of Optimal Foreign Exchange Hedging Without Exchange Rate Projections , 1978 .

[15]  The Optimal Level of Forward Exchange Transactions , 1973 .

[16]  H. Stoll.  An Empirical Study of the Forward Exchange Market under Fixed and Flexible Exchange Rate Systems , 1968 .

[17]  David P. Rutenberg,et al.  Managing Exchange Risks in a Floating World , 1976 .

[18]  E. Fama,et al.  Money, Bonds, and Foreign Exchange , 1979 .

[19]  H. Levy,et al.  International Diversification of Investment Portfolios , 1970 .

[20]  D. Logue,et al.  'White-Noise' in Imperfect Markets: The Case of the Franc/Dollar Exchange Rate , 1977 .

[21]  The Use of Multicurrency Financing by the Financial Manager , 1978 .

[22]  George M Feiger,et al.  Currency Option Bonds, Puts and Calls on Spot Exchange and the Hedging of Contingent Foreign Earnings , 1979 .

[23]  Gunter Dufey,et al.  The Random Behavior of Flexible Exchange Rates: Implications for Forecasting , 1975 .

[24]  Bruno H. Solnik,et al.  An equilibrium model of the international capital market , 1974 .

[25]  M. Levi.  Underutilization of Forward Markets or Rational Behavior , 1979 .

[26]  J. D. Vinso,et al.  Price Level Variations as Predictors of Flexible Exchange Rates , 1977 .

[27]  A. Shapiro.  Defining Exchange Risk , 1977 .

[28]  J. D. Vinso,et al.  Empirical Properties of Foreign Exchange Rates , 1978 .

[29]  I. Giddy.  Exchange Risk: Whose View? , 1977 .

[30]  Alan C. Shapiro.  Evaluating Financing Costs for Multinational Subsidiaries , 1975 .

[31]  John H. Makin.  PORTFOLIO THEORY AND THE PROBLEM OF FOREIGN EXCHANGE RISK , 1978 .

[32]  R. Litzenberger,et al.  Sharing rules and equilibrium in an international capital market under uncertainty , 1976 .

[33]  A. Shapiro.  EXCHANGE RATE CHANGES, INFLATION, AND THE VALUE OF THE MULTINATIONAL CORPORATION , 1975 .

[34]  Bradford Cornell.  Inflation, Relative Price Changes, and Exchange Risk , 1980 .