PwC and Knowledge@Wharton: Currency hedging: The risks and benefits aren’t limited to financial issues

May 2013
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PwC and Knowledge@Wharton: Currency hedging: The risks and benefits aren’t limited to financial issues

At a glance

Many multinational companies should rethink their exchange rate exposure and investor reactions in light of Increases in cross-border currency activity and rising currency volatility. Some investors prefer a company to retain risk due the the higher return potential, while others prefer lower risk. In this paper, PwC and Wharton suggest ways to achieve a balance between risk and return.

An increasing volume of cross-border activity, coupled with rising currency volatility, is forcing many multinational companies (MNCs) to think harder about exchange rate exposure and the way that investors react to the use of currency hedges and other derivatives.

Some investors want a company to retain risk, instead of hedging it out, often because of the potential for a higher return. Others may generally favor the industry’s prospects, but prefer to try to lower the risk of large swings in value. All of this used to be left entirely for investors to sort out. Explaining things in a way that analysts and shareholders will understand is increasingly important because accounting regulations now call for more transparency. In this paper, PwC and Wharton faculty offer some suggestions on how to strike a balance.

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