The Effects of Exchange Rate Exposure on Multinational Corporation and Management Foreign Exchange Risk
Xiaojin Sun (11115041)
Abstract
Recently, the outbreak of the virus has caused economic turbulence, affecting the exchange rate. As a part of the economy, the firm’s value is affected by the change of exchange rate. Previous researches mainly focused on foreign exchange derivatives hedging exchange rate risk, and there were few studies on other risk management methods. Therefore, this paper uses empirical research and OLS regression method to estimate the relationship between exchange rate exposure factors and the common stock return. Economic shocks will amplify the foreign exchange exposure for the firm. Combine the factors affecting foreign exchange risk exposure with the economic situation. Using foreign currency derivatives can reduce the impact of risk, but it cannot protect the competitiveness of enterprises. Therefore, internal management, adjusting the capital structure and reducing costs have become the better choice for enterprises.
Keywords: management exchange rate exposure, economic crisis, multinational corporations
Supervisor: Merve Mavuş Kütük Date submitted: 01 July 2020 Program code: BSc ECB
2
Statement of Originality
This document is written by Student Xiaojin Sun who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in
creating it.
The Faculty of Economics and Business is responsible solely for the supervision of the completion of the work, not for the contents.
3 Table of Contents
1. INTRODUCTION---4
2. LITERATURE REVIEW 2.1 The Relation Between The Economic Crisis And Exchange Rate---5
2.2 The Exchange Rate Risk Of Multinational Corporations ---6
2.3 Management Exchange Rate Risk---7
3. EMPIRICAL RESEARCH 3.1. Research Methodologies---8
3.2. Measuring Exchange Rate Risk Exposure---8
3.3. The Data Set---10
4. RESULTS---11
5. DISCUISS---16
6. CONCLUSIONS---17
REFERENCES
4
1. Introduction
Since the beginning of the 20th century, the trade between different parts of the world is becoming more and more frequent. Multinational enterprises promote world trade and economic corporations currency plays a very important role in world trade. After the Breton wood system was put forward, the foreign exchange market was not in disorder, which greatly promoted the trade between countries. Then, from the collapse of the gold standard system, various countries have been exploring whether the floating exchange rate or fixed exchange rate is more conducive to economic and trade. They even use the exchange rate as a tool to regulate the economy. This shows the importance of the exchange rate in the world and global trasactions. As a part of the economy, Papaioannou (2006) proposes that the change of exchange rate causes accounting risk, transaction risk, and operation risk, thus affecting the value of the enterprise. A set of excellent foreign exchange risk management system can strength the competitiveness of enterprises, create rich profits, reduce exchange losses, thus save costs, and even bring additional benefits through some foreign exchange derivatives.
Financial crises are inseparable parts of the world’s economic history. There have been different degrees of the financial crises all over the world, and they even led to economic recessions in developed and developing countries. At the beginning of 2020, the global outbreak of coronavirus, due to the global spread of the virus, different countries and regions of the economic shutdown, caused great losses in the world. The enterprise is faced with the sunk cost which is hard to bear. The impacts from the exchange rate also has been interacted because of the economic policies adopted by various countries. This has a huge impact on the liquidation of business costs and assets in multinational corporations in different countries and regions. Meanwhile, enterprises also face the risk of property loss from the change in exchange rate. The relationship between exchange rate and economic crisis has always been the object of extensive discussion and research. Ito and Sato (2008) thinks that the exchange rate affects interacted the crisis between countries. Gotz-Kozierkiewicz (1991) thinks that the exchange rate is a result of inflation. No matter how the academic circles argue on the relationship between the exchange rate and economic crisis, enterprises are more concerned about how to manage foreign exchange risk during an economic crisis. At present, most enterprises use Value as
5 Risk (VaR) to measure their foreign exchange exposure and adopt a series of hedging measures according to the exposure. The VaR method is mainly used to provide foreign exchange exposure for hedging means, but it cannot provide an important basis and reference value for foreign exchange management and strategy formulation. This paper uses the method ofCrabb’s study (2002), starting from the way that
exchange rate affects enterprise value, quantifies the influence degree of different ways, explores the influence of foreign exchange risk under different economic situations, and discusses the enterprise's strategy and foreign exchange management from the past economic crises.
The paper is organized in the following way. The second section of this paper is literature review, divided into three parts. One of them reviews the recent studies of the relation between the economic crisis and the exchange rate. The other part gives an overview of the exchange rate risk of multinational corporations. In the third section, it states the methods of management exchange rate risk. Next，it is empirical research, which includes methodologies used, model introduction, dataset. The fourth part and fifth part is results & discussion. Finally, the last part of this thesis concludes the research and presents some possible future development in this field.
2. Literature Review
2.1 The Relation Between Economic Crises And Exchange Rate
Financial crises has led unexpected inestimable currency fluctuate. The
consistent relationships between the financial crisis and the exchange rate changes is a difficult point. According to Fratzscher (2009), the financial crisis will instead cause a temporary appreciation of the U.S. dollar relative to other currencies. Kemme and Roy (2006) find that the long-term real exchange rate between Poland and Russia found that the currency had pressure to depreciate at the beginning of the financial crisis. This shows that under different exchange rate mechanisms, the effects of the economic crisis on the exchange rate is difficult to predict. Ito and Sato (2008) propose a transfer effect when studying the impacts of exchange rate changes on import prices by research the Asian Financial Crisis. During the economic crisis, various countries adopted different monetary policies to affect exchange rates and prices, thereby deepening the transmission effect. Based on this view, exchange rate changes are a gradual process of change, which is constantly adjusted according to the monetary policies of various countries and the interaction inflation between countries.
6 Therefore, in the economic crisis, the exchange rate changes a complex multiple linear relationship.
2.2 The Exchange Rate Risk of Multinational Corporations
Shapiro (1975) classifies the exchange rate risk as three parts, transaction exposure, accounting exposure, and economic exposure. Transaction exposure is that domestic currency exchange to foreign currency bring the uncertain risk when the firm fulfils the contract accounted with foreign currency. Accounting exposure is that when the parent company consolidates the financial statements of foreign
subsidiaries, the uncertain risk from converting foreign currency into cost account. The economic exposure is affected from economic policy, exchange control, etc..
The effect from exchange rate shock
In previous studies, exchange rate changes do not significantly affect the
earnings of common stock. Alder and Dumas (1984) definite the exchange risk as the regression coefficient of stock return with exchange rate change1. Jorion (1990) improves the regression to find that there are significant cross-sectional differences in the exposure of 287 U.S. multinational corporations. But there is no significant difference coefficient between the exchange rate change and the stock returns, at 5% significant level. He also finds that there is a difference of the exchange exposure in different industries. Amihud (2003) estimates the model for 32 "top exporters" of fortune between 1982 and 1989 and obtained the consistent results of the Jorion study.
The exchange rate risk impacts will change over time as the company's external positioning changes. Bartov and Bodnar (1994) also find lag effect from exchange rate on stock value in their studies. Nucci and Pozzolo (2001) find that the effect of exchange rate stock for enterprises is different from the degree of enterprises' participation in the domestic market. Combined with the relationship between the exchange rate and economic crisis, it can be seen that the effect of the exchange rate on multinational companies is also multi-dimensional. This influence is reflected in the company through the interaction between the economies, and further affects the economy through the company.
1 Alder and Dumas definite the exchange risk regression according to CAPM. The regression is 𝑟
𝑖𝑡= 𝛼𝑖+
𝛽𝑖𝑟𝑚𝑡+ 𝛾𝑖∆𝑒𝑡+ 𝜀𝑖𝑡. where rit is the firm i stock return in period t and rmt is the market portfolio rate of return in period t. where ∆𝑒𝑡 is the percentage change that domestic currency per unit of foreign currency, when the
7
The effect paths
In Crabb's study (2002), he controls the time-varying effect, which had
previously been ignored, to find three paths the exchange rate exchange affected. The results obtained by Nucci and Pozzolo (2001) support the view that domestic currency depreciation relative with other currencies has a positive impact on foreign sales and a negative impact through cost channels. In Gao ‘s research (2000) explains the effect from foreign sales on firm’s stock price, while an unexpected depreciation of U.S. dollar increases the foreign sales that bring positive benefit to firm. In the opposite, a appreciation of the U.S. dollar decreases the cost of sales. Firms need to input less volume to reach the transaction value.
Jorion’s study (1990) shows that foreign assets through exchange rate shock impacted bring a positive or negative effect on firm’s stock performance. If firms expected the foreign asset generate future cash flow, the effect is positive.
Considering the foreign asset may only use to product, the exchange rate change increases manufacturing cost which absolutely decreases firm value.
Foreign currency derivates is a path that impacts the relationship between exchange rate and firm’ s value, also a method to management exchange rate risk. Allayannis and Weston (2001) find that foreign currency derivates have a significant negative correlation on the interaction between the exchange rate and firms’ value.
2.3 Management Exchange Rate Risk
Before the Bretton Wood System broken, the methods of the foreign exchange risk management has been suppressed. This influence is reflected in the company through the interaction between the economies, and further affects the economy through the company. There are many hedge tools to manage the foreign exchange risk. Dufey and Srinivasulu (1983) categorize the management into financial hedge and operating hedge. Financial hedge takes foreign currency derivatives as the main methods to compensate exchange exposure. Chow et al. (1997) estimates model of American multinational firms and obtained the result that enterprises can reduce exchange rate risk by hedging risk. He and Ng (1998) find that there is a negative correlation between exchange rate exposure and derivatives hedging demand through the experience of Japanese multinational companies from 1979 to 1993. Operating hedge takes strategies to evade the exchange rate risk. Exactly, foreign currency derivatives efficiently reduce the loss, but it cannot preserve the firm from weaken the
8 competition when domestic currency appreciates (Bradley and Moles, 2002).
Allayannis and Weston (2001) points out that the risk exposure of enterprises through external sales and foreign trade is a very important factor, which can not only promote enterprises to hedge, but also guide enterprises to decide how much to hedge. They also found that foreign debt also has hedging power. Bodnar (2003) establishes the regression between the exchange rate risk exposure and the company's country model, and concluded that the company's overseas scale can affect the company's market value through the exchange rate. The company's multinational overseas operations can offset the risk of exchange rate changes. However, Allayannis and Weston (2001) find the multiple foreign currencies and foreign subsidiaries could not hedge
exchange rate risk through the multiple overseas regions and subsidiaries of
multinational companies. Papaioannou (2006) uses the variance covariance model to quickly calculate the foreign exchange position, and used VaR as the benchmark of hedging.
Overall, the effects of economic shocks on the exchange rate is unpredictable. Because of the unpredictability, enterprises face exchange rate risk. Exchange rates affect corporate value through overseas assets, overseas sales, and derivatives. Most enterprises use financial derivatives as the main methods to reduce the loss of foreign exchange risk, but it cannot protect the enterprises’ competitiveness. Therefore, the operation means have been paid more and more attention.
3. Empirical Research 3.1 Research methodology
In this paper, the methodology is the combination of quantitative analysis and qualitative analysis, through the summary of previous research to get the basic model, and then in the discovery of problems, put forward their own point of view for
verification. Finally, the empirical results are analyzed.
3.2 Measuring Exchange Rate Risk
The relationship between U.S. multinational corporate stock returns and exchange rate risk will be studied in this section. Adler and Dumas (1984) study the regression between the exposure to foreign currency risk and stock return inspired by CAPM. Adler and Dumas estimate the regression (1)
9 where rit is the firm i stock return in period t and rmt is the market portfolio rate
of return in period t. where ∆𝑒𝑡 is the percentage change that domestic currency per unit of foreign currency, when the positive value is a depreciation of the domestic currency. The coefficient 𝛾𝑖 measure exposure to exchange rate.
In order to study how the economic shock affects the exchange rate fluctuation on firm i stock return, increases a dummy variable Di, represent economic shock.
when the GDP growth rate >1, 𝐷𝑖 =0, this period records as economic boom. On the contrary, when the GDP growth rate <0, 𝐷𝑖=1, this period is called economic shock, 2008 and 2009. The regression is as:
𝑟𝑖𝑡= 𝛼𝑖+ 𝛽𝑖𝑟𝑚𝑡+ 𝛾𝑖∆𝑒𝑡+ 𝛿1𝐷𝑖+ 𝛿2𝑟𝑚𝑡𝐷𝑖+ 𝛿3∆𝑒𝑡𝐷𝑖+ 𝜀𝑖𝑡 (2) The correlations
𝛿
𝑖of 𝐷𝑖 is the effects from economic shock. It interacts with the market portfolio return and the exchange rate shock, ultimately, affects the firm i stock return.Here, the coefficients𝛿𝑖(𝑖 = 1,2,3) will be test that all of them are different form zero at significant level 5%. If they are different at 5% level, the economic shock has the interaction force on the exchange rate shock and affect the firm exchange exposure.
Crabb (2002) determines exchange rate fluctuations affect firm value by three ways which are foreign asset, operating income, and foreign exchange derivates. The 𝛾"is broken down as
𝛾𝑖 = 𝛾0+ 𝑦1𝑐1𝑖𝑡+ 𝑦2𝑐2𝑖𝑡+ 𝑦3𝑐3𝑖𝑡 (3)
Where Ckit (k = 1, 2, 3) are the sources of the exchange rate exposure for the
firm. C1it it is the foreign assets to total assets % for firm i in period t, C2it it is the
percentage of foreign sales to total sales for firm i in period t, and C3it is the
percentage of foreign currency derivates to total assets for firm i in period t. substituting (3) into (1):
𝑟𝑖𝑡= 𝛼𝑖+ 𝛾0∆𝑒𝑡+ 𝑦1∆𝑒𝑡𝑐1𝑖𝑡+ 𝑦2∆𝑒𝑡𝑐2𝑖𝑡+ 𝑦3∆𝑒𝑡𝑐3𝑖𝑡+ 𝜀𝑖𝑡(4) Where 𝛾#, 𝛾$,𝛾%,𝛾&measure the exposure to exchange rate changes keeping exposure to the market return constant.
There are three hypothesizes for 𝛾":
𝛾$: When the domestic currency depreciates (the exchange rate incrases), the higher the assets held abroad, the more cash flow is generated, and the exchange rate raise has a positive effect on the company's value.
10 𝛾%: When the domestic currency depreciates relative to the foreign currency, the greater the proportion of foreign sales to the total sales, the exchange rate increasing will have a positive effect on the value of the frim.
𝛾&:When a company using foreign currencies derivatives hedge risk exposure, it can reduce the force of exchange rate depreciation on corporate value, that is,
negative correlation.
The previous literature review mentioned the complex relationship between the exchange rate and the economic crisis. Substituting regression 3 into regression 2 to study how the economic shock affects the three paths.
𝑟"' = 𝛼" + 𝛾#∆𝑒'+ 𝑦$𝑐$"'∆𝑒'+ 𝑦%𝑐%"'∆𝑒'+ 𝑦&𝑐&"'∆𝑒'+ 𝛿$𝐷" + 𝛿%𝐷"∆𝑒'+ 𝛿&𝐷"𝑐$"'∆𝑒'+ 𝛿(𝐷"𝑐%"'∆𝑒'+ 𝛿)𝐷"𝑐&"'∆𝑒'+ +𝜀"' (5)
Here, the 𝛿𝑖(𝑖 = 1, 2, 3, 4, 5) are the coefficients of the economic shock impacts. If they were significant at 5%, the economic shock impacts are interacted with the exchange exposure paths.
3.3 The Data Set
The period of this study is from 2005 to 2020. The sample companies are selected from the Nasdaq 100 index (Nasdaq 100 does not include financial companies. The reason for choosing non-financial companies is that financial
companies will not use manufacturing or service industries. The same method is used to hedge foreign exchange exposure), excluding companies that have been merged, acquired, and restructured, excluding some companies that have not released overseas sales data or overseas assets during the cycle, and the remaining 25 companies. After referring the company's information, it is confirmed that all of them have overseas business and are multinational companies.
Use the Nasdaq 100 index as the market portfolio return. U.S. dollar index is used for the measurement of US exchange rate (used weighted geometric mean of the dollar’s value relative to Euro, Japanese yen, Pond sterling, Canadian dollar, Swedish krona, Swiss franc).
In regression 1 and regression 2, the data is based on monthly. Because many companies disclose overseas assets on a yearly basis, the data is based on yearly in regression 4 and regression 5. The Nasdaq 100 index and firm stock return will be handled to get annual return. The exchange rate exchange will be converted to be yearly average.
11 Collect annual financial reimbursement and stock return data from WRDS and Factset databases. Table 1 and Table 2 list the descriptive statistics of key variables and correlation for regression 1 and regression 2. Table 3 and table 4 list the
descriptive statistic of key variables and correlation for regression 4 and regression 5.
4. Result
In the first stage, regression 1 is used to clarify the effect of market returns and exchange rate changes on the return of stock for firm i. The results are illustrated in Table 5:
Table 5 Regression 1analysis with dependent variable stock return VARIABLES Coefficient Robust Sta. Err. P-value
𝑟𝑚𝑡 1.1783 0.0357 0.000
∆𝑒
𝑡 0.0708 0.0678 0.296Constant 0.0017 0.0014 0.225
R2 0.3129
obs 3956
At the 5% level, this coefficient is significant. The coefficient of market return is positive, which means that there is a positive correlation between market portfolio return and firm i common stock return. There is a positive correlation between exchange rate change and firm i common stock return, at the 5% level, this effect is not valid. This result is consistent with previous research that the exchange rate shock has not a significant effect on the firm stock return. However, it does not preclude the possibility of sample bias. There are a few sample companies selected to study. In addition, the selected companies are multinational companies covered by the Nasdaq 100 Index, such as Apple, Google, and Amazon. There is a correlation with the market portfolio return. The coefficient of exchange rate shock is affected by the market portfolio.
In the second stage, regression 2 is used to study whether the company's stock returns can be affected by the economic shock, the path is the exchange rate change. The results are shown in Table 6.
12 Table 6 Regression 2 analysis with depend variable stock return
VARIABLES Coefficient Coefficient 𝑟*' 1.1783*** (.0357) 1.0599 *** (.0360) ∆𝑒' .0708 (.0678) -0.0485 (.0638) 𝐷" -0.0136** (.0053) 𝐷" 𝑟*' .3228*** (.0851) 𝐷" ∆𝑒' 0.4051** (.1793) constant 0.0017 (.0014) 0.0051*** (.0014) R2 0.3129 0.3195 obs 3956 3956
F-test for economic shock = 7.42, p-value = 0.0001 Robust standard error in parentheses *p-value < 0.1 **p-value < 0.05 ***p-value < 0.01
It is significant at 5% level, there is different between economic shock and normal time. When D = 0 (the GDP growth > 0, excluding 2008 and 2009), the coefficient of exchange rate change is negative but not significant at 5%. It is consistent with pervious study. In the normal time, a good economic situation, the force of exchange rate has weak power to affect the firm’s stock return, since the exchange rate fluctuation is in the normal range. When D =1 (the GDP growth < 0, 2008 and 2009), the coefficient of exchange rate fluctuate is positive and significant at 5% level. This result illustrates that the stock value is increasing when the domestic currency depreciates against other currencies. The difference between the two
13 coefficients is bigger than zero, at 5% significant level. It illustrates that economic shock strength the force from exchange rate on stock return.
In the third stage, regression 4 is used for regression analysis to learn the paths that exchange rate stock affected impact the firm common stock return. The results are in the table 7.
Table 7 regression 4 analysis with depend variable stock return VARIABLES Coefficient Robust Std. Err. P-value
∆𝑒' -0.8907 0.5483 0.105 ∆𝑒𝑡𝑐1𝑖𝑡 -1.3601 1.3906 0.329 ∆𝑒𝑡𝑐2𝑖𝑡 0.0066 1.0552 0.995 ∆𝑒𝑡𝑐3𝑖𝑡 0.6550 0.2468 0.008 constant 0.0164 0.0017 0.000 R2 0.0526 obs 329
The coefficient of the exchange rate changes that affect share returns through overseas assets is negative, which is not significant at the 5% level. This is contrary to the previously predicted results, which means that the results negate the possibility that overseas assets will generate cash flow, which may have a positive impact. According to Crabb (2002), the overseas assets of multinational companies may only be used for production. Only the present value of these assets affects the company’s value, the exchange rate has a negative influence on the value of the corporation through overseas assets. The second reason is that these overseas assets are the corporation's external financial assets. These assets impact on the company's value through the exchange rate increased is negative.
The coefficient of foreign exchange rate change is negative through foreign sales, which is contrary with the previous forecast results, but at the 5% level, this effect is negligible. This result reflects that the effect on the cost of sales is bigger than the effect on sales income. According to Marshall Lerner condition (2010), the domestic currency depreciation, the effect on the net export is like a J-curve. At the
14 begin of the depreciation, because the already contracts have to be done with previous value. For the firms, they need to provide more goods to customers than before. So the total cost accounted in U.S. dollar is more than before.
The effect of hedging foreign exchange risk through foreign currency derivates is negative while it is significant at the 5% level. It is consistent with previous
literatures. The multinational corporations can use foreign currency derivatives to efficient hedge the exchange currency exposure. However, considering that the available value of this data is very small, the foreign currency derivates disclosed by the company are few, there is a sample bias.
In the fourth stage, regression 5 is used for regression analysis to study whether the foreign exchange shock force on the three paths is strengthen by economic shock. When D = 0, it regresses the data from 2005 to 2019 excluding 2008 and 2009. When D =1, if regress the data in 2008and 2009. The results are shown in Table 8:
Table 8 regression 4 analysis with dependent variable stock return
VARIABLES Coefficient Coefficient
∆𝑒' -0.8907 (.5483) -0.1160 (.4939) ∆𝑒𝑡𝑐1𝑖𝑡 -1.360 (1.3906) -1.5039 (1.38241) ∆𝑒𝑡𝑐2𝑖𝑡 0.0066 (1.0552) -0.4627 (1.0208) ∆𝑒𝑡𝑐3𝑖𝑡 0.6550*** (.2468) 0.2495 (.2272) 𝐷" -0.0090** (.0043) 𝐷"∆𝑒' -9.5546*** (1.9326) 𝐷"𝑐$"'∆𝑒' -.1774 (3.3294)
15 𝐷"𝑐%"'∆𝑒' 5.095 (3.0081 ) 𝐷"𝑐&"'∆𝑒' 0 (omitted) constant 0..0170*** (.0015) 0.01820*** (.0017) R2 0.0270 0.2302 obs 329 329
F-test for economic shock= 17.64, p-value = 0.0000 Robust standard error in parentheses
*p-value < 0.1, **p-value < 0.05, ***p-value < 0.01
Compare the coefficients of separate economic period, according to the F-test, there is different between economic shock and normal time. when it is a stable economic situation, the effect from exchange rate fluctuation is negligible at 5% significant level. This result is consistent with previous learner, the effect from exchange rate on firm’s value is not significant. At the 5% level, during the economic shock, the multinational corporations’ values are worse than in the normal time.
𝛿% is significantly different from zero during economic crisis. During the
economic shock, the multinational corporation’ s value is worse by the exchange rate risk.
𝛿& is not significantly different from zero during the economic crisis. One reason
is accounting exposure. If the firm did not sales the asset to transfer into parent firm, there is not actual loss from the accounting behavior. But it is partly consistent with the pervious point of Crabb (2002), the exchange rate shock has a negative effect on the firm value through the value only used to product or finance.
𝛿( is represented a positive influence on the company's stock returns from
foreign sales during economic shock. It is not significant at 5% level, but valid at 10% level. The positive effect is consistent with previous study. The domestic currency depreciation bring benefit to firm when the firm convert the foreign cash flow into domestic currency accounted.
16 𝛿) is omitted, because the selected companies disclose too few relevant data, and there is a sample bias.
5. Discussion
This section discusses how companies manage their foreign exchange exposure in conjunction with OLS regression data and literature review.
Based on the above result, during a good economic situation, the effect from the exchange rate fluctuation is negligible. However, the economic crisis strength the influence from exchange rate on stock return. It is worse the enterprise value, even to go bankrupt. Although, in this thesis, foreign currency derivatives cannot hedge the exchange rate exposure. However, previous studies have sufficient empirical evidence to prove that currency derivatives can effectively reduce the influence of foreign exchange. Firms use foreign currency derivatives to be a compensation for the exchange rate exposure, but it is not a good choose for preserving competition. Therefore, management exchange rate risk from internal is crucial.
For foreign assets aspect, manage cost of production is an efficient method to reduce risk and protect firm’s competition. Firstly, the book value of overseas assets held in accounting statistics will change with the fluctuation of exchange rate. This kind of influence has no concrete influence on the actual value of the enterprise. Using effective and reasonable foreign exchange derivatives or forward foreign exchange contracts can effectively avoid risks and reduce losses caused by foreign exchange changes. Secondly, Firms Use the price gap from exchange rate to arbitrary and buy the material with a lower price to reduce the cost of production. In the accounting aspect, there is a collinearly between the foreign assets and foreign sales. This reduce product cost method is also useful on reduce cost of sales. Thirdly, get the debt with foreign currency. The exchange rate risk is from operating domestic
currency. Using foreign currency debt restructure the capital structure which is reduce the exchange shock negative effect.
Foreign sales have a significant impact on the cash flow. In an economic recession, enterprises can consider using part of the income from overseas sales for local investment or long-term asset holding to disperse the recession cycle.
In the existing research, a lot of experience has proved that foreign currency derivatives can effectively hedge foreign exchange risk. Companies need to choose between the diversity of derivatives and hedging costs. Excessive derivatives will
17 increase costs and reduce the effectiveness of hedging. The lack of diversity will lead to the failure to effectively reduce the risk. In the application of derivatives, there are higher professional requirements. If there are no professionals, the efficiency of using derivatives to hedge risks will be greatly reduced.
In the economic crisis, protecting the competitiveness of enterprises is conducive to the generation of cash flow for multinational corporations. If the domestic
economic situation is worse than before, multinational corporations expand the foreign market which protect firms and compensate the loss in the domestic market. At this time, the flexible use of external debt with foreign currency, the use of cash reinvestment to create value, the use of price differentials to reduce costs and adjust the distribution of overseas markets are better than choosing derivative.
6. Conclusion
According to the results of the sample, the impact of exchange rate changes on the stock returns is not obvious. Because the exchange rate is impacted by national policy, foreign exchange control, inflation, monetary policy and other factors, it is difficult to determine how foreign exchange affects enterprise value in complex reality. However, through empirical research, it finds that there is a link between the exchange rate exposure and the company value between the overseas assets and foreign sales. A large number of other studies have proved that foreign currency derivatives can effectively hedge foreign exchange risk. The force of exchange exposure is strengthened by economic shock, although there is a complex relationship between them. According to these results, enterprises not only pay attention to the application of foreign currency derivatives, but also need to make a strategy for economic shock. Foreign exchange management of enterprises should pay more attention to internal management. Adjusting capital structure, avoiding foreign exchange risk, reducing production cost by using price difference, creating new cash flow through reinvestment of cash flow, and adjusting the distribution of overseas markets are all effective means to protect competitiveness in the event of economic shock.
In this study, the control of the time variable is very simple, just select different time period data into the regression equation. In the future research, we can improve this point and control the time variable more effectively. The future research direction
18 is to learn the endogenous variables of hedging foreign exchange risk based on the external debt, overseas market distribution and other internal methods.
19
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21
Appendix
Table 1: Descriptive statistics for regression 1 and regression 2
VARIABLES obs Mean Sta. dev Min Max
𝑟"' 3957 1.4370% 0.1035 -85.3191% 85.9903%
𝑟*' 3957 1.0651% 0.0496 -16.1361% 12.9635%
∆𝑒' 3957 0.1228% 0.0228 -6.5900% 7.7800%
𝐷" 3957 0.1390 0.3460 0 1
Table 2: the correlations for regression 1 and regression 2
𝑟"' 𝑟*' ∆𝑒' 𝐷"
𝑟"' 1
𝑟*' 0.5592 1
∆𝑒' -0.1728 -0.3339 1
𝐷" -0.1093 -0.1215 0.0134 1
Table 3: descriptive statistics for regression 4 and regression 5
VARIABLES obs Mean Sta. dev Min Max
𝑟
𝑖𝑡 329 1.4986% .0306 -10.3140% 11.3453%∆𝑒
𝑡 329 0.121% .0057 -0.8525% 1.0208% 𝐷𝑖 329 13.3739% .34089 0 1𝑎𝑠𝑠𝑒𝑡
329 24.2375% .2515 0% 98.3539%𝑠𝑎𝑙𝑒𝑠
329 41.1595% .2925 0% 92.5208%𝑑𝑒𝑟𝑖𝑣𝑎𝑡𝑒𝑠
329 1.7954% .14666 0% 2.2769%22 Table 4: the correlation for regression 4 and regression 5
𝑟"' ∆𝑒' 𝑎𝑠𝑠𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 𝑑𝑒𝑟𝑖𝑣𝑎𝑡𝑒𝑠 𝐷" 𝑟"' 1 ∆𝑒' -0.2187 1 𝑎𝑠𝑠𝑒𝑡 0.0526 -0.0186 1 𝑠𝑎𝑙𝑒𝑠 -0.0564 0.0321 0.1257 1 𝑑𝑒𝑟𝑖𝑣𝑎𝑡𝑒𝑠 0.0165 0.0963 -0.0188 0.0636 1 𝐷" -0.2023 0.0002 -0.0440 -0.0309 -0.0482 1
