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on Risk Management |
| By: | Michael G. Papaioannou |
| Abstract: | Measuring and managing exchange rate risk exposure is important for reducing a firm's vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm's exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical versus strategical and passive versus active hedging. In addition, it outlines a set of widely accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by U.S. firms. |
| Keywords: | Financial risk , financial management , foreign exchange hedging , exchange hedging , corporate hedging practices , Financial risk , Risk management , Foreign exchange , Exchange rates , Industry , Economic models , |
| Date: | 2006–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/255&r=rmg |
| By: | Andre Santos; Jorge A. Chan-Lau |
| Abstract: | Currency mismatches in corporate balance sheets have been singled out as an important factor underlying the severity of recent financial crises. We propose several structural models for measuring default risk for firms with currency mismatches in their asset/liability structure. The proposed models can be adapted to different exchange rate regimes, are analytically tractable, and can be estimated using available equity price and balance sheet data. The paper provides a detailed explanation on how to calibrate the models and discusses two applications to financial surveillance: the measurement of systematic risk in the corporate sector and the estimation of prudential leverage ratios consistent with regulatory capital ratios in the banking sector. |
| Keywords: | Default risk , currency mismatch , dollarization , corporate sector , econometric estimation , financial surveillance , Credit risk , Currencies , Financial crisis , Dollarization , Economic models , |
| Date: | 2006–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/269&r=rmg |