This paper looks at the impact that unanticipated changes in the exchange rate, specifically the currency crises that took place in Latin America between 1998 and 2004, had on the value of Spanish companies in this emerging region. It also studies the strategies, decisions, measures, and initiatives that these firms made to improve the effectiveness of their hedging activities. Building upon previous studies in industrialised countries, the study applies a broad perspective as it takes a cross-functional approach by including finance, strategic planning, marketing, and operations management in the analysis. The data was collected from interviews containing structured and open-ended questions with senior managers and directors of the largest Spanish investors in Latin America and then analysed using quantitative and qualitative methods. The quantitative study involves a time series regression to calculate a foreign exchange exposure coefficient. The qualitative analysis uses a systematic approach to develop categories from the data gathered in the interviews. As predicted, companies have used a set of tools and techniques, including decisions about their strategy, operations, marketing, and finance, to hedge their foreign exchange exposure as the availability of financial instruments is limited in the emerging markets under study. In particular, the results of the qualitative section show that (i) the assessment of foreign exchange exposure in Latin America is difficult and that subsidiaries were affected by the currency crises even when using financial hedging tools, (ii) firms put in place non-financial mechanisms to protect their investments such as a policy of majority control and the assessment of foreign exchange exposure during the planning stage, and (iii) companies developed postcrises initiatives like dedicated research teams, exchange rate policies, and investments in other currency area to offset their exposure in Latin America. The quantitative analysis present three tiers of foreign exchange exposure within the sample, low, moderate, and high. A posterior cross-analysis of the quantitative and quantitative analyses show that (i) companies with operations in multiple currencies have higher possibilities of offsetting their foreign exchange exposure; (ii) that unexpected fluctuations in the value of the currencies in emerging markets affect different areas within the company and that an effective way to deal with this challenge is by assessing the foreign exchange exposure between the functional areas; and (iii) that giving more autonomy to subsidiaries operating in changing environments to make decisions and implement initiatives against foreign exchange exposure seems to be effective in dealing with this risk. All in all, the research results suggest that foreign companies exposed to exchange risks in emerging markets gain resilience when decentralising the decision-making and implementation of hedging initiatives to subsidiaries to (i) elaborate scenarios, (ii) assess possible impacts of exchange rate variations, (iii) design pre-emptive measures, and (iv) set alternative strategies to mitigate potential impacts. This multi-functional and systemic approach to manage risks seems to offer companies higher flexibility and new knowledge that can be shared among subsidiaries working in similar economic and political environments.

Political Studies Association Conference 2007
Incae Business School

Cardoza, G, & Fornes, G. (2007). A Study of Spanish Companies’ Hedging Strategies in Latin America. Presented at the Political Studies Association Conference 2007.