Hedging Behavior by Multinational Firms

This paper examines the impact of the presence of a forward exchange market on the financial and operational decisions of a multinational firm. The study concentrates especially on the effects of increased uncertainly and increased risk aversion on the part of the multinational firm. It is shown that the presence of the forward market allows the firm to respond to changes in uncertainly and risk aversion by adjusting its transactions in the forward market while leaving its production and sales decisions unchanged. The forward market, thus, promotes stability with respect to the operational as opposed to the financial variables; and its also makes it possible to adopt decentralized decision making.© 1982 JIBS. Journal of International Business Studies (1982) 13, 59–70