Stephen Makar

Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk?

Abstract Using a unique dataset, this study examines the relationship between foreign-denominated debt (FDD), foreign currency exposure and foreign currency derivative (FCD) use, for a sample of US multinational corporations. We find a positive relationship between the exposure to foreign currency risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover, FDD is negatively related to the use of FCD. We interpret this as further evidence that FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk.

Foreign exchange derivatives, exchange rate changes, and the value of the firm: U.S. multinationals’ use of short-term financial instruments to manage currency risk

Abstract This paper examines the firm value effects of exchange rate changes in relation to the use of short-term foreign exchange derivatives (FXD) for U.S. multinationals. We provide evidence that the lagged firm value effects of changes in exchange rates are particular to low FXD users, and that the magnitude of such currency exposure decreases monotonically across FXD user groups. Additional analyses consider multiple lagged exchange rate changes and both firm size and degree of foreign involvement, and confirm our primary findings. Moreover, our results indicate that cross-sectional differences in the magnitude of lagged currency exposure are inversely related to FXD use.

The FX exposure puzzle: insights from SEC disclosures

Purpose - Using firm-specific SEC currency risk disclosures, this paper aims to provide insight into the puzzling absence of significant returns-based foreign exchange exposure (FXE). Such a hand gathered disclosure data identify the bilateral exchange rate to which the firm is most vulnerable (BRV) and the firms FX hedge techniques. Design/methodology/approach - The BRV-based estimates of FXE are compared to the FXE estimates using the broad trade-weighted index (TWI) data that are prevalent in prior research. Multivariate regression and sample partitioning by level of value and size premiums are used to analyze these alternative FXE estimates. Findings - The univariate results reveal a higher percentage of firms with significant BRV-estimated FXE compared to TWI-estimated FXE. Multivariate tests indicate a negative relation between firm-specific financial hedging and BRV-estimated FXE (but not TWI-estimated FXE), controlling for firm-specific non-financial/operational hedging, size and industry effects. Moreover, firms in the first and fifth quintiles for measures of value/growth and size have higher levels of FXE. Practical implications - Using SEC currency risk disclosures improves the analysis of firm-specific FXE, allowing investors to better estimate risk and cost of capital. Originality/value - The paper helps resolve the FX exposure puzzle using a unique dataset of firm-specific currency risk disclosures. The improved estimates of FXE provide a more detailed risk profile of multinational firms.

Foreign currency translation under the temporal rate method

Statements of Financial Accounting Standards (SFAS) are rules and procedures designed to establish reliable financial information. The Financial Accounting Standards Board (FASB) defines reliable financial information in Statement of Financial Accounting Concept No. 2 as information that is reasonably free from error and bias and faithfully represents what it purports to represent [FASB, 1980, paragraphs 59, 77]. Under SFAS No. 52 [FASB, 1981], however, the temporal rate method of translating foreign currency denominated financial statements may not produce reliable information. The result is that consolidated financial statements of U.S. companies may include unreliable components such as under (over) valued assets. The findings of this paper are important because unreliable financial information places U.S. firms at a competitive disadvantage by hindering efficient and effective business decisions.

Derivative Use and Accounting Regulation Change: Does SFAS No. 133 Hedge Accounting Affect Currency Risk Management Decisions?

The main purpose of this study is to investigate foreign exchange derivatives (FXD) use and the impact of accounting regulation change. We examine whether SFAS No. 133 hedge accounting measures explain changes in FXD use. The main results indicate that mark-to-market hedge accounting adjustments are determinants of FXD use. This suggests that firms anticipate the net economic effects associated with these SFAS No. 133 adjustments and modify their FXD use in a way that is consistent with optimal hedge theory. In addition, we find evidence that the use of hedge accounting under SFAS No. 133 has incremental power to explain changes in FXD use.