Foreign Exchange Risk Management With Derivatives Of Non-financial Companies

The line between the foreign exchange risk of financial companies and non-financial companies is distinguished previously. For a non-financial company, foreign exchange risk has roots in foreign exchange transactions, which is unavoidable for multinational companies. Previous researches have shown that foreign exchange rate exposure is related to firm size, liquidity, leverage, opportunity options, return horizon, along with foreign sales and hedging.Non-financial companies have multiple purposes in managing their foreign exchange risk, and they also have a set of techniques to choose from. External techniques, as well as internal techniques, have been proven to be an efficient way of managing short-term foreign exchange risk. There are evidences that external techniques, especially forwards and swaps are overwhelmingly used foreign currency derivatives (FCD) in alleviating foreign exchange rate exposures for non-financial companies.Though the data of usage of FCD is quite difficult to collect, we investigate the data set of Australian companies to research on purposes of non-financial companies using FCD in alleviating foreign exchange rate exposures, and provide further robustness tests for the performance of FCD. As expected, the results are basically in accordance with previous researches.While foreign exchange exposure appears to be a function of foreign sales and hedging, the way a non-financial company selecting what kind of FCD to hedge foreign exchange exposures is hard to define in mathematical frame. In the last chapter, we discuss the different features of some mostly used FCD to provide in-depth analysis of non-financial companies'preference when using external techniques.