multinational firms in more competitive industries are more likely to use

Multinational firms in more competitive industries

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multinational firms in more competitive industries are more likely to use currency derivatives. 31 The first-order autocorrelation for the monthly trade-weighted US dollar exchange rate from 1973 to 1998 is 0.98.
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28 HDG management strongly believes that its particular foreign exchange risk management strategy provides an important competitive advantage in the product market. This belief, in part, motivates their desire to keep their identity hidden. It is also an important determinant of how the firm structures its hedges. As evidence of this, HDG actively researches the hedging programs of its major US-based competitors. The forex group makes a quarterly report to the FXMC detailing publicly-available information regarding the foreign exchange hedging programs of its four main competitors. Most of this information is collected from government filings (10-Q, 10-K, and annual reports). The forex group also interprets the information in an attempt to determine the exposures of its competitors. For example, the report on one competitor reads, “[Competitor's] hedging practice should leave them exposed to a strengthening USD. At December 31, 1996, [competitor] had forward contracts designated to hedge transaction exposures but there was no disclosure of anticipatory hedges.” Tracking the hedging activities of competitors may be especially important for HDG since the majority of other large firms in their industry also use currency derivatives (Géczy, Minton, and Shrand, 1997, Table II) HDG is also aware of the impact currency movements can have on its competitive position in relation to foreign competitors. For a given country, these competitors can be either local manufacturers or from a third country. HDG managers express concern over the “double whammy” of simultaneous strengthening of the dollar and weakening of a major foreign competitor’s home currency against the currency of a country which represents a large amount of foreign sales. By firm policy, HDG could not directly hedge this secondary exposure. Another concrete example of how HDG believes its hedging program can translate into competitive benefits concerns the firm’s hedging strategy in Southeast Asia during the Asian crisis. The firm maintained a small short position in foreign currency forward contracts during the time of the most significant devaluations. Consequently, the firm did not have to pay out significant sums on derivative contracts as it suspects some of its competitors did. This translated into significant immediate cost savings that were passed on to customers as a price cut (not immediately matched by competitors). In a
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29 press release the firm announced that, “Any negative effect on [HDG] from conditions in Asia was more than offset by associated reductions in procurement costs.” If foreign exchange rates impact the competitive position of HDG in its foreign markets, this could be reflected in the company’s share of foreign markets.
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  • Spring '17
  • Foreign exchange market, HDG

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