[Currency Risk Management of UK International Trading Companies Face to Extraordinary Exchange Rate Movements]

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ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.



DECLARATION

I [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

Foreign exchange risk can be a serious problem facing companies engaged in international activity. This is particularly so for an exporting company which is regularly servicing overseas markets. Whilst we have some theories of how this risk ought to be managed, we know less about how companies actually face this problem m the UK, where exports are approximately 30% of GDP. This paper sets out the findings of a questionnaire survey of 426 British exporting companies and examines the approach used by exporters in comparison with normative models. Exporters can manage transactions' exposure in several ways. The risk can simply be shifted on to the buyer by invoicing in sterling, so that there is no uncertainty as to the sterling value of receivables between contract initiation and payment. Alternatively, the exporter can invoice in a foreign currency and manage the risk through the financial markets. Examples of the techniques available to an exporter include forward exchange contracts, currency futures and options contracts, and short-term borrowing in the money markets.

This empirical study builds upon the study conducted to provide more recent evidence and comparisons with more recent models. Examples of environmental changes since the mid-1970 include the abolition of exchange controls, the setting-up of the London lnternational Financial Futures Exchange and the availability of traded currency options in London. Whereas other recent studies have concentrated upon the multinational corporation and more behavioural issues, this study focuses on the management of transactions' exposure by the significant and regular exporter. In this paper we distinguish between exports made at 'arm's length' and those internal to a multinational company, since exchange risk arising from direct and indirect exports will be treated differently by the exporter.

The results give strong support for the hypotheses that direct exports of heterogeneous products are more likely to be invoiced in sterling, while those of homogeneous products are more likely to be invoiced in the importer's currency or a vehicle currency (US dollars). Support is also found for the hypothesis that exporters of products with some degree of product differentiation are less likely to be price-takers, though the hypothesis that, because these exporters invoice in sterling they provide some compensation for the buyer by offering easier credit terms, is not supported at a statistically significant level.

Table of Contents

ACKNOWLEDGEMENTii

DECLARATIONiii

ABSTRACTiv

Background1

Effects of Exchange Rate Movements3

Management of Currency Risk in UK Companies3

Invoicing Currency And Payment Terms5

Hypotheses And Prior Empirical Results5

Methodology and Sample7

Empirical Results9

Hypothesis 19

Hypothesis 210

Hypothesis 311

Summary and Conclusions12

Currency Risk Management of ...