Three Agency‐Cost Reasons for Hedging Foreign Exchange Risk

Abstract

Given that it is costly, the widespread use of foreign exchange hedging is puzzling for several reasons. In an efficient market exchange rate fluctuations should even out over time. Also, exchange rate risk is generally regarded as unsystematic, and even if it is systematic investors can themselves hedge the risk. This paper answers the question of why firms hedge foreign exchange risk by invoking three agency problems. Given the existence of any of these agency problems, foreign exchange hedging does not merely impact firm risk. By smoothing cash‐flow streams, it also impacts directly firm value.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 20 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.