Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms

November 1, 2006

Preview Citation

Format: Chicago

Michael G. Papaioannou Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Measuring and managing exchange rate risk exposure is important for reducing a firm's vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm's exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical versus strategical and passive versus active hedging. In addition, it outlines a set of widely accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by U.S. firms.

Subject: Currencies, Exchange rate risk, Foreign currency exposure, Foreign exchange, Hedging

Keywords: Cash flow, Currency, Currency risk, Economic risk, Exchange rate, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/255
Stock No:

WPIEA2006255
ISBN:

9781451865158
ISSN:

1018-5941

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