Exchange Rate Risk Management in Project Business – A Case Study
Hynninen, Jussi (2012)
2012
Kuvaus
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Tiivistelmä
This thesis analyses exchange rate risk management in a case company. Analysis is based on theoretical literature of subject and empirical study of exchange rate risk management in the case company.
Theoretical framework of exchange rate risk management is based on the violation of perfect market conditions. This creates a rationale for a company to hedge against exchange rate movements – instead of leaving this task to investors. Theoretical literature helps to determine how exchange rate movements affect firm value which, according to basic finance theory, is the ultimate measure of company success. Theoretical literature has also studied how different hedging strategies and instruments could be used to mitigate exchange rate risk.
This thesis being a case study, methods to execute research needs to be chosen accordingly. In this case, the case study approach is the most suitable method to document current practices regarding exchange rate hedging. Main contributor in the research phase is the intranet-based questionnaire. It is used to provide information about current hedging practices, but also to get development ideas concerning hedging process.
Based on the results of the questionnaire, it seems that hedging guidelines and practical instructions of how hedging should be executed are not sufficient enough. It was mentioned that with current instructions it is challenging to ensure that IAS 39 is applied. Also, it was discovered that because of inflexibility of hedging guidelines and lack of communication, some exposures are not hedged as they should be regarding to hedging guidelines of the case company. Results also suggest that a more active consideration regarding the possibilities of partially covering hedges should be encouraged.
Theoretical framework of exchange rate risk management is based on the violation of perfect market conditions. This creates a rationale for a company to hedge against exchange rate movements – instead of leaving this task to investors. Theoretical literature helps to determine how exchange rate movements affect firm value which, according to basic finance theory, is the ultimate measure of company success. Theoretical literature has also studied how different hedging strategies and instruments could be used to mitigate exchange rate risk.
This thesis being a case study, methods to execute research needs to be chosen accordingly. In this case, the case study approach is the most suitable method to document current practices regarding exchange rate hedging. Main contributor in the research phase is the intranet-based questionnaire. It is used to provide information about current hedging practices, but also to get development ideas concerning hedging process.
Based on the results of the questionnaire, it seems that hedging guidelines and practical instructions of how hedging should be executed are not sufficient enough. It was mentioned that with current instructions it is challenging to ensure that IAS 39 is applied. Also, it was discovered that because of inflexibility of hedging guidelines and lack of communication, some exposures are not hedged as they should be regarding to hedging guidelines of the case company. Results also suggest that a more active consideration regarding the possibilities of partially covering hedges should be encouraged.