Foreign exchange management—A strategic approach

Changes in exchange rates affect the value of the firm because of the sensitivity of corporate cash flows to exchange rate fluctuations. Notwithstanding innovation in foreign exchange risk management, there are situations where hedging does not protect the firm against the adverse impact of unanticipated changes in exchange rates. This paper discusses a particular, although very common, case of economic exposure in which firms have continuous contractual cash flows denominated in a foreign currency showing a persistent appreciation or depreciation vis-à-vis the firm's home currency. We present alternative strategic responses when hedging techniques are inadequate.