This work attempts to analyse the effects that variations in the exchange rate and in the quality of the institutional environment in Latin American emerging markets had on the operating profits of companies with investments in the region, as well as to try to assess the outcomes of the decisions made by these companies in order to minimise their exposure to the fluctuations in the value of different currencies. For these purposes, on the one hand, the model proposed by Sundaram and Black (1992), multiple denominations of value (MV) and multiple sources of external authority (MA), was applied to some of the largest Spanish corporations with operations in Latin America. On the other hand, the decisions made by these corporations were surveyed and analysed against a foreign exchange exposure coefficient. The methodology included the calculation of time series and cross sectional regressions using variations in the companies’ EBITDA and a foreign exchange exposure coefficient as dependent variables. The findings suggest that the changes in the variables object of this study, MA and MV, did not have a significant effect on the companies’ operating profits and that the economic exposure assessment made only by finance (or finance-related areas) explains a high proportion of their foreign exchange exposure.

Foreign direct investments, exchange rate risk, emerging markets, institutional environments, Spanish investments in Latin America
Incae Business School

Cardoza, G, & Fornes, G. (2006). Spanish Companies in Latin America: A Winding Road.