Foreign exchange exposure in emerging markets

Abstract

Purpose The purpose of this paper is to look at the impact that unanticipated changes in the exchange rate, specifically the currency crises that took place in Latin America between 1998 and 2004, had on the value of Spanish companies operating in this region. It also studies the strategies, decisions, measures and initiatives that these firms made to improve the effectiveness of their hedging activities. Building upon previous studies in industrialised countries, the study applies a broader perspective as it takes a cross‐functional approach by including finance, strategic planning, marketing and operations management in the analysis. Design/methodology/approach The paper uses qualitative and quantitative analyses to reach its conclusions. The quantitative study involves a time series regression to calculate a foreign exchange exposure (FOREX) coefficient. The qualitative analysis uses a systematic approach to develop categories from the data gathered in the interviews. Finally, the conclusions from both analyses were summarised and combined. The data was collected from interviews containing structured and open‐ended questions with senior managers and directors of the largest Spanish investors in Latin America. Findings The research results suggest that foreign companies exposed to exchange risks in emerging markets gain resilience when they take a cross‐functional approach for the assessment and implementation of hedging strategies along with the decentralisation to subsidiaries of the decisions and implementation of hedging initiatives. This helps companies in: elaborating scenarios, assessing the possible impact of exchange rate variations, designing pre‐emptive measures and setting alternative strategies to mitigate potential impacts. This cross‐functional approach to managing risks in emerging markets seems to offer companies higher flexibility and new knowledge that can be shared among subsidiaries working in similar economic and political environments. Originality/value The results from this empirical study build upon previous works on FOREX and offer companies an alternative approach to minimise its impacts when operating in emerging markets.

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