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Journal of Business Management and Economic DevelopmentJournal of Business Management and Economic DevelopmentThis literature review examines hedging strategies employed by companies to mitigate foreign exchange risk in cross-border transactions. The aim is to synthesize findings from existing studies to provide a comprehensive understanding of the effectiveness, determinants, and challenges of currency hedging practices. The review follows a systematic approach, including searching, selecting, and analyzing relevant literature from 2018 to 2024. The findings reveal that companies actively use various derivative instruments and operational hedging techniques to manage exchange rate exposure. While many studies demonstrate the effectiveness of hedging strategies in reducing risk and enhancing firm performance, some report inconsistent results, suggesting that hedging effectiveness can vary depending on various factors. Firm size, financial leverage, growth opportunities, and the level of exchange rate exposure consistently influence firms decisions to hedge. However, implementing hedging strategies also faces challenges related to instrument selection, transaction costs, margin requirements, and accounting treatment. The review identifies research gaps, including the need for studies in emerging markets, exploration of innovative hedging techniques, integrated research approaches, and investigation of the non-financial impacts of hedging. The findings contribute to our understanding of currency hedging strategies and provide valuable insights for companies in managing exchange rate risk in an increasingly dynamic global business environment.
This literature review comprehensively examines hedging strategies for mitigating exchange rate risk in cross-border transactions.The findings indicate that companies utilize a range of derivative instruments and operational techniques to manage exposure, though the effectiveness of these strategies varies.Key factors influencing hedging decisions include firm size, financial leverage, growth opportunities, and the level of exchange rate exposure.Ultimately, this review highlights the importance of understanding both the benefits and challenges of hedging, and identifies areas for future research to further refine risk management practices in a dynamic global landscape.
Future research should investigate hedging practices in developing countries and among small to medium-sized enterprises, as current literature primarily focuses on large firms in developed economies. Furthermore, exploring the effectiveness of innovative hedging instruments, such as structured products and blockchain technology, could provide valuable insights into emerging risk management techniques. Finally, research should move beyond solely assessing financial impacts and investigate the non-financial consequences of hedging, such as effects on company reputation and investor perception, to provide a more holistic understanding of its overall value. These investigations should employ mixed-methods approaches, combining quantitative analysis with qualitative insights from practitioners, to provide a richer and more nuanced understanding of the complexities of exchange rate hedging in a rapidly evolving global environment.
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