A recent study of manufacturing firms from 16 countries found that the average firm hedges 20 to 30% of its FX operating exposure by operational methods, such as operational hedging and FX pass-through. The study also found that the average firm mitigates its FX operating and business exposure a further 40% through financial hedging strategies, mainly with foreign currency debt.1
This chapter shows how foreign currency debt works to hedge the effects of FX rate changes on a firm with a positive (long) FX business exposure to the foreign currency. As the FX price of the foreign currency changes, the value of the foreign currency debt, when measured in the firm’s home currency, changes in the same direction as the ...
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