Exchange rate risks in the automotive industry - What strategies do enterprises use to mitigate these risks ?

Abstract

This master’s thesis investigates the occurrence of exchange rate risks among European, Japanese, US, Chinese and South Korean automotive firms and uses data from 26 companies from 1 January 2002 to 15 November 2018. Furthermore, the thesis analyses the hedging methods and accounting standards used by the respective sample on the basis of an examination of annual reports. We find empirical evidence of the existence of currency risks throughout the entire sample. The results tend to support that these exposures vary over time and, in most cases, are effectively neutralised by automotive firms. It is conspicuous that the Chinese sample and companies, dominated by truck businesses are exposed to less risk due to their foreign share of sales and international production network respectively. Other firms, such as Daimler AG, are exposed to foreign currency translation but undertake effective countermeasures to hedge these risks. In line with the previous literature, we get ambiguous results about the sign of the exposures . The investigated firms implement countermeasures using natural hedging techniques and derivative financial instruments such as currency forward contracts, currency swaps, cross-currency swaps, currency options and foreign currency debt. Only limited evidence is found for hedging translation risk, while all firms aim to neutralise transaction exposures.