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Currency Hedging Management in Global Firms. The case of Heidelberg Cement

Söderlund, Astrid; Wickelgren, Nils and Andersson, Christian (2004)
Department of Business Administration
Abstract
Our ever-changing world has to a great extent created a need of efficient financial risk-management programs for financial institutions and corporations operating in a demanding international environment. These changes have however also increased the types of financial tools and derivatives used to handle the multifold macroeconomic exposures. Companies have therefore diversified opportunities to take in action to reduce and to control the different risks they are exposed to. One purpose of financial risk management is to control the down side of the exposure by insuring that the level of risk remains within an acceptable range. Macroeconomic exposures include among others; interest rate risk and inflation rate risk. However, one of the... (More)
Our ever-changing world has to a great extent created a need of efficient financial risk-management programs for financial institutions and corporations operating in a demanding international environment. These changes have however also increased the types of financial tools and derivatives used to handle the multifold macroeconomic exposures. Companies have therefore diversified opportunities to take in action to reduce and to control the different risks they are exposed to. One purpose of financial risk management is to control the down side of the exposure by insuring that the level of risk remains within an acceptable range. Macroeconomic exposures include among others; interest rate risk and inflation rate risk. However, one of the most significant exposures for a global corporation to focus on might be the exchange rate risk. One way to handle currency risk is to include and to carefully prepare currency-hedging strategies in the firm’s overall risk management program. The optimal level of currency-hedging activities is a widely discussed topic among researchers in the financial area. There are a lot of theories related to the subject, however the strategies developed cannot be seen as general, due to that every company faces a unique situation, which requires an exclusive strategy. Therefore, it is still up to the top management of the individual corporation and to the risk management team to deal with the currency risk exposure and to come up with a suitable strategy for the own firm.
The purpose is to study currency hedging strategies, the decisions making process behind currency hedging and different factors affecting currency hedging decisions in the multinational company HeidelbergCement. We also want to study differences and similarities between corporate reality and theory by comparing the case of HeidelbergCement with existing hedging theories. By studying HeidelbergCement's way of "thinking" and other non-quantitative measures our aim is further to increase the understanding behind the hedging procedure and to contribute to already existing research in the area.
The area of risk management and currency hedging is a well-exploited area. Existing studies observe corporate risk management and currency hedging and give it a quantitative, measurable surface. However, there are still studies that can be done to add further knowledge and understanding how and why to hedge currency exposures. Therefore, there is a need of further qualitative studies to increase the understanding of currency hedging. To contribute to this already well-examined field of finance we therefore chose to present an in-depth case study of a company with global activities and a developed financial risk management and currency-hedging program.
The intuitions of our results steam from the fact that recent technological and financial innovations have increased the demand for risk management. Parallel to this increase, companies are taking a more in-depth look at the importance of hedging. The derivatives market is a multibillion-dollar market, which has been by most countermeasures successful of serving the need of its users. The era of financial services is entering a new stage in corporate performance assessment. The new precocious growth in this area has increased the importance of the new risk paradigm. The desire to understand and control the future is large among companies. However there is a dilemma in finding the absolute certainty in markets, which makes risk management of utmost importance in firms. For firms operating in the corporate world today the desire to produce sustainable growth, to develop intrinsic corporate profits and control the downside of potential losses is greater then ever. The five different variables we identified and assessed are as bellow:  Financial distress
 Risk attitude
 Organizational structure
 Legal framework
 Stakeholders The (Less)
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@misc{1346039,
  abstract     = {Our ever-changing world has to a great extent created a need of efficient financial risk-management programs for financial institutions and corporations operating in a demanding international environment. These changes have however also increased the types of financial tools and derivatives used to handle the multifold macroeconomic exposures. Companies have therefore diversified opportunities to take in action to reduce and to control the different risks they are exposed to. One purpose of financial risk management is to control the down side of the exposure by insuring that the level of risk remains within an acceptable range. Macroeconomic exposures include among others; interest rate risk and inflation rate risk. However, one of the most significant exposures for a global corporation to focus on might be the exchange rate risk. One way to handle currency risk is to include and to carefully prepare currency-hedging strategies in the firm’s overall risk management program. The optimal level of currency-hedging activities is a widely discussed topic among researchers in the financial area. There are a lot of theories related to the subject, however the strategies developed cannot be seen as general, due to that every company faces a unique situation, which requires an exclusive strategy. Therefore, it is still up to the top management of the individual corporation and to the risk management team to deal with the currency risk exposure and to come up with a suitable strategy for the own firm.
The purpose is to study currency hedging strategies, the decisions making process behind currency hedging and different factors affecting currency hedging decisions in the multinational company HeidelbergCement. We also want to study differences and similarities between corporate reality and theory by comparing the case of HeidelbergCement with existing hedging theories. By studying HeidelbergCement's way of "thinking" and other non-quantitative measures our aim is further to increase the understanding behind the hedging procedure and to contribute to already existing research in the area.
The area of risk management and currency hedging is a well-exploited area. Existing studies observe corporate risk management and currency hedging and give it a quantitative, measurable surface. However, there are still studies that can be done to add further knowledge and understanding how and why to hedge currency exposures. Therefore, there is a need of further qualitative studies to increase the understanding of currency hedging. To contribute to this already well-examined field of finance we therefore chose to present an in-depth case study of a company with global activities and a developed financial risk management and currency-hedging program.
The intuitions of our results steam from the fact that recent technological and financial innovations have increased the demand for risk management. Parallel to this increase, companies are taking a more in-depth look at the importance of hedging. The derivatives market is a multibillion-dollar market, which has been by most countermeasures successful of serving the need of its users. The era of financial services is entering a new stage in corporate performance assessment. The new precocious growth in this area has increased the importance of the new risk paradigm. The desire to understand and control the future is large among companies. However there is a dilemma in finding the absolute certainty in markets, which makes risk management of utmost importance in firms. For firms operating in the corporate world today the desire to produce sustainable growth, to develop intrinsic corporate profits and control the downside of potential losses is greater then ever. The five different variables we identified and assessed are as bellow:  Financial distress
 Risk attitude
 Organizational structure
 Legal framework
 Stakeholders The},
  author       = {Söderlund, Astrid and Wickelgren, Nils and Andersson, Christian},
  keyword      = {currency hedging,risk management,exchange rate risks,parity conditions,exposure differentials,risk attitudes,financial forecasts,legal frameworks for derivatives,Heidelberg Cement,Management of enterprises,Företagsledning, management},
  language     = {eng},
  note         = {Student Paper},
  title        = {Currency Hedging Management in Global Firms. The case of Heidelberg Cement},
  year         = {2004},
}