Foreign Exchange Risk Management in Multinational Corporations: an Integrated Approach.

The primary objective of this research is to provide an integrated approach to the problem of corporate foreign exchange risk management in a multinational firm. There are many ways in which an exchange rate change can affect the cash flows of a firm. A change in the value of a currency may affect the cash flows of a subsidiary located in that country; it may affect the cash fows of other subsidiaries; it may affect the domestic operations of the parent firm; also, it affects contractual obligations denominated in that currency. In each case, any or all of these effects may be present and they may function to either reinforce or to offset each other. Further, the effects of international diversification may simultaneously be experienced. A proper optimization approach requires an explicit consideration of all these effects simultaneously. Considering a few of these effects, while ignoring others, would result in suboptimization. In this study all the effects are considered simultaneously. In this dissertation, all the subsets of corporate foreign exchange problem are organized under five different types of covariance terms. These covariances capture all the interrelated effects of exchange rate changes on the firm. Furthermore, this study develops an optimal hedging strategy that differs in several important respects from existing hedging models. While existing methods of foreign exchange management based on portfolio concepts consider the covariance of exchange rates, they ignore several crucial interrelated effects of exchange rates on returns. In contrast, here a generalized solution is developed that explicitly incorporates all covariances between exchange rates and returns with each other and among themselves. It is demonstrated that the existing models are subsets and special cases of the model developed in this study.Ph.D.Business administrationUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/159460/1/8314361.pd