British corporate currency exposure and foreign exchange risk management

Edelshain, David (1995) British corporate currency exposure and foreign exchange risk management. Doctoral thesis, University of London: London Business School.

Abstract

This thesis investigates corporate management of exposure to changes in exchange rates. Hypotheses of how currency exposure is perceived and managed are derived from the theoretical literature. A contingency model of the way managers deal with this exposure is suggested and tested by conducting a two stage survey of practice in Times 1000 British based corporations. It is hypothesised that the way these corporations manage their currency exposure is dependent on three groups of forces. It is dependent first on regulatory and market forces in the environment external to the corporation, second on the way in which different forms of currency exposure impact the corporation and third, on the way the corporation organises itself internally to manage its exposure. Regulatory and market forces are also hypothesised to influence both the internal organisation of currency exposure management and forms of currency exposure experienced and the latter are hypothesised to influence directly the shape of the internal organisation of exposure management. It is further hypothesised that these same three groups of factors influence or determine the perception of the effectiveness of different currency exposure management methods used. A large scale postal survey was conducted and was informed by detailed interviewing of managers in fifteen corporations. The results obtained from 119 usable responses from over six hundred corporations contacted were used to test the model proposed. It was found that foreign exchange risk management method usage was weakly associated with market and regulatory forces in the environment external to the corporation, but strongly associated with the way a corporation organised internally to manage the issue. Although external market forces also associated strongly with forms of exposure identified by survey respondents, no direct link was identified between forms of exposure and methods a corporation used to manage it. Methods used to manage currency exposure considered highly effective were found to be associated only with aspects of a corporation's internal organisation of exposure management, with no link apparent with the corporation's external regulatory and market environment. The power of the contingency model was found to be modest and elements of the original model could be discarded. The importance of taking into account organisational and behavioural variables in understanding the management of a technical phenomenon was underlined.