Estimation of and determinants of exchange rate exposure and hedging activities of United States multinational corporations

This dissertation examines various empirical issues about the foreign exchange rate exposure and hedging activities of U.S. multinational firms. This paper investigates the relation between changes in exchange rates and changes in firm value, explores the determinants of differential exchange-rate exposure across multinational corporations, and examines the effectiveness of hedging policies of U.S. multinational firms.; The measurement errors hypothesis is tested using three estimation models; (1) a regional sales-based index, (2) a forward index, and (3) an ARMA exchange rate index. The three estimation models result in a higher percentage of firms having a significant exchange-rate exposure when compared to previous studies.; OLS regression estimates of the determinants of exchange rate exposure suggest that the cross-sectional differences in the degree of exchange exposure are negatively related to firm size and positively related to the degree of foreign operation.; Moreover, I find that there is a negative, statistically significant association between the absolute value of the exposures and the use of currency derivatives. These results support the conclusion that the use of currency derivatives significantly reduces a firms' exchange rate exposure and U.S. multinational firms use foreign currency derivatives as protection against adverse exchange-rate movements.