Exchange Rate Risk Mitigation: Measuring and Managing the Foreign Exposure

Student: Chandler Antczak*
Mentor: Lucjan Orlowski
Major: Finance

Identifying, measuring, and managing exchange rate risk exposure are important factors when a multinational firm is looking to protect itself against its vulnerabilities to exchange rate fluctuations. This paper reviews the typical types of exchange rate risk faced by international firms: transaction, economic, and translation exposure, examines the VaR model as the preferred method of measuring a firm’s exchange rate risk, and determines the main hedging strategies to mitigate against the exposure. In addition, the paper goes into detail of how today’s international firms are participating in the foreign exchange market and which hedging instruments are the most relevant.

*Honors Senior