Foreign Exchange Risk Management in Multinationals:An Empirical Investigation on China, Japan and US

Abstract:

Companies especially multinational companies are now exposed to risks caused by unexpected movements in exchange rate. The management of foreign exchange risk has become essential for the survival of companies in today’s volatile financial markets.

This paper reviews the traditional types of exchange rate risk faced by firms, namely translation, transaction and operating risk, presents measurement and management method for foreign exchange exposure and objectives of foreign exchange management.

The central purpose of this thesis is to examine the foreign exchange risk management in American, Japanese and Chinese companies by comparing hedging practices among 30 companies, of which are 10 from each country.

We approach our research by analyzing the annual report of our sample companies in the year of 2006, it is found that American and Japanese companies tend to hedge foreign exchange risk more than Chinese companies, also have more diversity of derivatives usage. Although China has reformed the exchange rate policy from pegging US dollar to a managed floating exchange rate system recently, it is still suggested that Chinese firms are less active than American and Japanese firms in the foreign exchange management activity. After we did our research, we found the companies always put focus on hedging transaction risk, the companies in China prefer to use home country currency as function currency while American and Japanese companies prefer to use domestic currency as function currency.

So after we did our analysis, we feel that in China, the company need to reinforce the consciousness to hedge exchange rate risk, use diversification instrument to hedge foreign exchange risk and doing adjustment in accounting rules in translation of foreign currencies.

For very little have been investigated on financial risk management in Chinese companies, we wish our study can contribute to the foreign exchange risk management research.