Title: Managing asymmetric foreign exchange exposure with financial derivatives: evidence from Korean firms

Authors: Sung C. Bae; Taek Ho Kwon

Addresses: Department of Finance, College of Business Administration, Bowling Green State University, Bowling Green, OH 43403, USA ' Department of Business Administration, Chungnam National University, Daejon, South Korea

Abstract: We provide new evidence on two issues pertaining to foreign exchange exposure. Employing a large sample of Korean firms during 1998 to 2005, we analyse the characteristics of firms' asymmetric foreign exchange exposures and the effectiveness of financial derivatives in managing such exposures. Our results show that exporting firms have relatively large degrees of total asymmetric foreign exchange exposure, especially in response to declining exchange rates of local currency. In contrast, firms with USD-denominated debt exhibit large degrees of asymmetric exposure in response to both increasing and declining exchange rates but in the opposite direction, which results in relatively small total foreign exchange exposure for these firms. Our regression results further show that the usage of financial derivatives is negatively but insignificantly related to the asymmetric foreign exchange exposure, indicating limited effectiveness of financial derivatives in managing Korean firms' asymmetric foreign exchange exposure.

Keywords: asymmetric exposure; foreign exchange exposure; financial derivatives; FINDER; South Korea.

DOI: 10.1504/IJBD.2015.071402

International Journal of Bonds and Derivatives, 2015 Vol.1 No.3, pp.217 - 236

Received: 16 Jan 2015
Accepted: 04 Feb 2015
Published online: 25 Aug 2015 *

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