Management of Foreign Exchange Risk: A Case for Multinational Companies in USA (Research Proposal Sample)

Management of Foreign Exchange Risk: A Case for Multinational Companies in USA
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Introduction and Background to the Study
The field of financial risk management has been of great interest in the recent past owing to the increased exposure of firms to financial risks, especially those operating globally, which erodes their annual revenues. Hampton (2011) defines financial risk management as an organizational practice of building economic value by managing a firm’s risk exposure through the use of relevant financial instruments.
Financial risk management is currently utilized in mitigating various financial risk exposures such currency risks, and other systemic risks (Matz & Neu, 2007). Since multinational companies (MNCs) are more vulnerable to foreign exchange risks than other risks due to the nature of their financial operations, foreign exchange risk management techniques have been found to be crucial in immunizing such MNCs against losses attributable to foreign exchange transactions.
The key aim/purpose of this research is to enable MNCs effectively manage their foreign exchange risk exposures. The researcher may find it interesting to look for solutions to the following research questions: (1) What are the key drivers of foreign exchange fluctuations in an economy (2) To what extent are MNCs exposed to foreign exchange risks (types of foreign exchange exposures)? (3) What common strategies do firms apply in hedging foreign exchange risks and how effective are these strategies? (4) What are the key motivations behind the management of foreign exchange risks in MNCs? (5) Are there any relationships between a firm’s foreign exchange risk management strategies and other aspects of the company such as company size?
The scope of the research will be limited to the management of foreign exchange risk exposures in MNCs. The rationale for the selected research topic is based on the fact that despite of many previous studies on financial risk management, less research has been devoted to how US MNCs handle their foreign exchange risk exposures. Moreover, evidence reveals that within the context of corporate valuation theory, foreign exchange issues are habitually neglected or marginalized despite of their significant influence on the company valuation. In some cases, managers tend to refrain from active management of foreign exchange risk due to their insufficient expertise on appropriate mitigation strategies (Saudagaran, 2009). This evidence implies that the topic is crucial in making MNCs realize their full economic potential via proper management of currency/foreign exchange risks.
In conducting this study, the researcher will found some assumptions as being necessary, even though they add up on research limitations. First, it will be assumed that the information obtained from respondents to study questionnaires (financial managers of MNCs) will be accurate as given. In addition, in making conclusions about the collected data, an assumption of generalization will be utilized. Moreover, there is an assumption that the research team will not violate the research ethics of any research participant, especially the respondents to the research questionnaires.
Literature Review
For MNCs, the management of foreign exchange risk exposures is a central component of their financial risk management strategy. Apte (2010) defines foreign exchange or currency risk as a net possible loss or gain that a firm may incur arising from fluctuations in a country foreign exchange or currency rates. Based on financial management literature, it is argued that currency risk consideration is critical since it affects an enterprise’s cash flows, solvency, profitability, and even competitiveness (Madura, 2010).
Owing to previous studies, it is clear that fluctuations in foreign exchange rates, which in turn trigger currency risks, are as a result of changes in a number of economic variables (drivers). These include interest rates, GDP, an inflation rate, fluctuations in money supply, and changes in BOP (Nucu, 2011). For instance, literature postulates an inverse relationship between interest rates and foreign exchange rates (Nucu, 2011). This implies that if the central bank, for instance, raises the cost of borrowing money from the money market through an increase in widow discount rates, the value of the economy’s currency will appreciate. The relationship between inflation rate and foreign exchange rate (domestic currency application) is said to be indirect (for indirect quotes). Arnold (2010) asserts that foreign exchange rates vary directly with variations in GDP and money supply.
MNCs are vulnerable to three key types of foreign exchange exposures: transaction, translation and economic exposure (Wang, 2009). Translation exposure, also known as accounting exposure, is the risk that unanticipated changes in foreign exchange rated pose on a firm’s financial reporting, given than all MNCs need to consolidate their financial statements at the end of every fiscal year. Transaction exposure is the risk that anticipated changes in currency rates pose on contractual cashflow denominated in foreign currencies. According to Megginson et al (2008), economic exposure is the risk that variations in exchange rates may affect the value or competitive position of a firm.
Research Methodology
In this study, a qualitative research design will be utilized by the researcher. In establishing the relationship between items under study, the research subjects will be tested once. Owing to a number of practical and theoretical reasons, the researcher will adopt a probability sampling method (stratified sampling method). In this case, in choosing the study sample, the population of MNCs in the USA will be divided into small groups (states). Thereafter, a random sample of MNCs will be chosen from each state.
The target population will be made of only one group of people, financial managers. The research subjects will be selected from 20 states. From each state, 5 MNCs (5 financial managers) will be selected. The total sample size will consist of 100 financial managers. The rationale for adopting a large (100 subjects) is to improve the level of exactitude of study results (Gravetter & Forzano, 2011).
Since the survey will depend on individual views and perceptions, primary data collection approach will be utilized. The primary data will be collected both structured questionnaires, distributed to the respondents via mails, emails and hand delivery, and use of personal interviews (Harris & Brown, 2011). To a particular extent, the researcher will find it necessary to review secondary data sources.
During data analysis and interpretation, the collected data will undergo codification to assign it arithmetical values for easy statistical analysis. With no hypothesis testing, the researcher will adopt descriptive statistics, to deeply describe the characteristics of study variables, as opposed to complex data analysis approaches such as VAR model analysis (Meyers, 2011).
Empirical/Expected Results
The expected risk management techniques employed in 100 MNCs may not be significantly different from what is stipulated in the literature review. Ideally, the results will revolve around financial derivative...