Diverse Types of Foreign Exchange Exposure and Hedging Techniques of Multinational Enterprises: A Survey Revisited
Purpose: This study examines the fundamental concepts underlying the three major types of foreign exchange exposure faced by multinational enterprises. It explains the nature of each exposure type and outlines the management techniques available to address them. Particular emphasis is placed on identifying effective hedging strategies as well as circumstances in which hedging may be unnecessary or inappropriate. In addition, the study reviews prior empirical research on corporate responses to foreign exchange exposure and synthesizes the key findings. Design/Methodology/Approach: Translation exposure refers to the impact of exchange rate fluctuations on a firm’s consolidated financial statements. Transaction exposure measures the effect of exchange rate changes on contractual cash flows arising from assets or liabilities that are denominated in foreign currencies and will be settled in the future. Operating exposure, also known as economic exposure, captures the impact of unexpected exchange rate movements on a firm’s expected future cash flows. Findings: This study surveys the existing literature on translation, transaction, and operating exposure, discusses the hedging techniques most recommended for managing each type, and identifies conditions under which hedging methods are appropriate or inappropriate. Practical Implications: Foreign exchange exposure reflects the degree to which a firm’s profitability, net cash flows, and market value are sensitive to exchange rate movements. Effective measurement and management of this exposure are therefore essential for financial managers seeking to protect and enhance firm performance. Originality/Value: The study provides an integrated review of the three primary channels through which exchange rate movements affect firms—translation exposure, transaction exposure, and operating exposure—and offers a structured framework for understanding their management.