Foreign exchange risk management in UK multinational companies
While there have been a number of studies of foreign exchange risk management in UK Multinational Companies (MNCs), the management of economic exposure has received very little attention. The aim of this study was to describe the management of economic exposure (and its relationship to transaction exposure) in UK MNCs. A random sample of twenty MNCs was selected, and archival data relevant to foreign exchange risk management were gathered. Finance personnel in both the HQ and the Irish subsidiaries of the twenty companies were interviewed. The results of the study with respect to transaction exposure were similar to previous studies. However, data collected at a subsidiary level revealed that the degree of centralisation may be underestimated by HQ treasurers, since divisional personnel may influence the practices in foreign subsidiaries. The degree of centralisation was explained by the presence of transaction costs in foreign exchange markets, and a relationship between centralisation and netting opportunities was detected. The in-house bank was highlighted as a mechanism for realising transaction cost savings without decreasing operating unit autonomy. An examination of the economic exposures of the sample companies revealed that economic exposure might be classified into four subsets: 1) Sticky Price Exposure (of which transaction exposure is a subset) 2) Traded Good Exposure (which arises from the tradeability of the MNC's products and factors of production) 3) Parallel Import Exposure 4) The Macroeconomic and Sectoral Consequences of Exchange Rate Changes The managerial response to economic exposure was also examined. The majority of corporate treasurers were only involved in transaction exposures and, with a few exceptions, the response to economic exposure was operational rather than financial. Political and promotional tactics were used extensively to manage economic exposure in the short-run. The creation of barriers to entry (and the resultant decrease in the tradeability of the firm's products) was a popular medium-run strategy. The author also found that only some of the sample MNCs had significant economic exposures. Finally, a decision support model was developed in order to operationalise the measurement of economic exposure, and the evaluation of exposure management alternatives.