Corporate Risk Management for Multinational Corporations: Financial and Operational Hedging Policies

Posted: 5 Jul 1998

See all articles by Bhagwan Chowdhry

Bhagwan Chowdhry

UCLA Anderson; Indian School of Business

Jonathan T.B. Howe

BlackRock, Inc - San Francisco

Multiple version iconThere are 2 versions of this paper

Date Written: November 1995

Abstract

We show that multinational corporations will engage in operational hedging only when both exchange rate uncertainty and demand uncertainty are present. The firm is more likely to establish plants in both the domestic as well as the foreign location if the fixed costs of establishing a plant are lower or if the variability in the exchange rate is higher. If the firm establishes plants in both the domestic as well as the foreign location, the foreign currency cash flow will, in general, not be independent of the exchange rate and the optimal financial hedging contract will not be a forward contract. The firm is more likely to establish larger capacity in the foreign location if the variability of the foreign demand relative to the variability of domestic demand is larger or if the expected profitability is larger. If the variability of foreign demand is equal to the variability of domestic demand, the firm will establish a larger capacity in the foreign location as long as the expected profit margin is positive.

JEL Classification: G39

Suggested Citation

Chowdhry, Bhagwan and Howe, Jonathan T.B., Corporate Risk Management for Multinational Corporations: Financial and Operational Hedging Policies (November 1995). Available at SSRN: https://ssrn.com/abstract=7085

Bhagwan Chowdhry

UCLA Anderson ( email )

Los Angeles, CA 90095-1481
United States
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Indian School of Business ( email )

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India

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Jonathan T.B. Howe (Contact Author)

BlackRock, Inc - San Francisco ( email )

400 Howard Street
San Francisco, CA 94105
United States

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