09
Corporate Currency Hedging
by admin ·
A corporation like the NFL thinking about building a German subsidiary like the GFL is not the only type of firm worried about declines in the value of the euro. In fact, there are three types of firms that immediately come to mind:
1. U.S. firms thinking about establishing a foreign subsidiary or selling products in foreign markets—like the NFL.
2. U.S. exporters. For example, Boeing builds aircraft in the United States, so its costs are mostly in dollars. It sells aircraft in Europe, and these aircraft may be paid for in euros. If the euro appreciates, it is good news when it is time to deliver. Instead of $108 million per plane, Boeing might receive $116 million per plane. But if the euro depreciates, it would be bad for Boeing. It might receive only $100 million per plane.
3. European importers. For example, the large mail-order computer retailer Vobis Germany purchases U.S. computer hardware and software in dollars, and resells them in Germany for euros. If the euro depreciates, its U.S. dollar inputs become more expensive.
In some cases, currency movements may not influence cash flow volatility—for instance, it could be that Vobis and all computer retailers in Germany can raise their selling prices in line with their input costs, so there is no cash flow volatility—but this is fairly rare. Our question now is: What can firms that are worried about currency movements do to reduce their cash flow volatilities?