Does the Combined Use of Financial and Operational Hedging Reduce Foreign Exchange rate Exposure?

Mohammad Al-Shboul
James Cook University
Australia

Abstract:
The purpose of this study is to investigate the impact of the combined use of financial hedging (foreign currency derivatives and foreign debt) and operational hedges on the foreign exchange risk exposure for a sample of 62 Australian multinational corporations. A two-stage market model is used, resulting in the implementation of a cross-sectional time series model, to test for the effect of the combined use of those two hedging activities on the exposure reduction and to test whether financial hedging use is a complement to operational hedging. The study finds that the combined use of those two hedging strategies is effective in reducing the exposure and financial hedging strategies complement operational hedging activities in reducing the exposure.