Title: Erroneous and Valid Reasons for Hedging Foreign Exchange Rate Exposure
Authors: Levi, MD ×
Sercu, Piet #
Issue Date: 1991
Series Title: Journal of Multinational Financial Management vol:1 issue:2 pages:25-37
Abstract: This paper dismisses a number of rationales for corporate level hedging of foreign exchange exposure. It is argued that there is no basis for hedging to reduce variance in asset/liability values, to exploit risk premia in forward rates, to enjoy scale economies in transaction costs, or to overcome individual shareholder shortselling restrictions. Indeed, it is argued that we cannot even define a target exposure. The paper concludes by identifying several valid reasons for hedging. Two potentially valid reasons are better internal information and better investment decisions if managers cannot personally hedge. Other reasons are related to costs of financial distress from 'imperfections' in the product, labor, and capital markets, and bankruptcy costs
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Research Center International Finance, Leuven
× corresponding author
# (joint) last author

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