Foreign exchange exposure-based strategy building for non-financial corporations

In the presence of deviations from parity conditions, the influence of foreign exchange rate variability beyond the range of financial companies only, and now represents to be an important source of risk for nonfinancial corporations. This research takes Japan as an example and examines how foreign currency movements affect Japanese manufacturing companies. From firm and industry perspectives, we find 16% of 65 sample companies and three out of six sub sectors of manufacturing industry experienced an economically significant effect from exposure to the U.S. Dollar, the Chinese Yuan, or the European Euro from January 2002 to December 2007. Based on the findings, we propose a hedging method using real options analysis and a binomial decision tree model as a strategy to mitigate the impact of exchange rate exposure, which illustrates that options theory can provide useful financial hedges by introducing adjustment costs or providing faster adjustment procedures.