Corporate Foreign Exchange Risk Management

Preface

Foreign exchange risk management (FXRM) is one of those topics that one never stops learning new things about. It is so complex and oftentimes counterintuitive that a firm grip on it keeps eluding us – even after a sustained effort over many years. Surprises and ‘aha’ moments continue to turn up even well after we have begun to think of ourselves as somewhat experienced and knowledgeable in the area. Nor does it take a very large business operation for FX exposures to become so intricate that our common sense and back‐of‐the‐envelope calculations fail to reliably guide us.

Managers intent on managing exposures to FX may, given these limitations of our intuitive assessments, seek guidance in the literature. The available texts on FXRM generally fall into one of two main categories. One is the analysis of the risk management decision in mainstream academic finance. Textbooks in international finance, for example, fall into this category. The cases used have in common that they take place in a stylized setting that abstracts away from various real‐world complexities: the exposures are known; there is no uncertainty about any decision parameter; there are no side‐effects due to the accounting of the transactions; no distracting self‐interest on the part of the decision‐makers. Instead, the focus is on laying bare the principles that dictate the correct decision from an economic perspective. The usefulness of this approach lies in the fact that it identifies some core determinants ...