Hedging currency risks: An accounting perspective

Paper offers an accounting perspective to hedging currency risk from both a theoretical and practical perspective. The increased pace of the globalization process enhances the impact of exchange rate fluctuations upon various ratios reflecting the efficiency of entities conducting transactions in foreign currency. Exchange rate fluctuations taking place since contracting until payment might significantly impact the contracting parties generating an either positive or negative effect. Since currency risk is quantifiable, we consequently argue for the corresponding measures to avoid it, as well as for the advantages of their implementation. Paper approaches strategies in hedging currency risk from both a theoretical and practical perspective. From the theoretical point of view we mainly look at currency hedging techniques being established through trade literature and practice while developing an overview of research literature (mainly accounting) in the area. On the other hand, we also analyze the use of various techniques for hedging currency in practice. The idea of companies disclosing information in relation to their risk management policies as a management tool is also discussed.

The objective of this paper would finally be to document the necessity of developing an adequate system of surveillance and control measures imposed through the certainty of currency risk itself. The purpose and benefit in developing such a system as a component of sound corporate governance policies would be to limit companies’ exposure to currency risk. Conclusions document the usefulness of such measures capturing the interest of researchers, practitioners and regulators in search for appropriate solutions to avoid or at least minimize currency risk.

The research objective is to document the interest towards hedging currency risk based on research and trade literature. The first is considered with regard to researchers’ preoccupation in risk management literature and the latter helps identify practical hedging strategies.  Considering the proposed objective, keywords such as currency risk, hedging and derivatives become implicit, while positioning this study in the area of risk management literature links this study to corporate governance and management and marketing objectives. Study contributes to the body of risk management literature which has been on researchers’ agenda during the last three decades, but significantly intensified during the last decade as documented through this analysis. The originality of our approach consists in focusing on the particular case of currency risk which we consider important for stakeholders as long as it nowadays still impacts company’s financial position and performance. The employed research methodology relies on literature review specific methods. Conclusions argue for incorporating the results obtained while developing a comprehensive overview of research and trade literature in risk management practices. Moreover, we argue that companies’ use of derivatives to hedge foreign currency exposure should be coordinated through sound corporate governance mechanisms.

This work was supported from the project number POSDRU/89/1.5/S/59184 ‘Performance and excellence in postdoctoral research within the field of economic sciences in Romania’ and project P403/11/0002 registered in the Czech Science Foundation (GACR).