Risk of company on foreign currency exchange borrowings in Turkey

Turkey is a fast developing country, large manufacturing firms are started their big projects and some of them use foreign currency borrowing to finance their projects, these firms are exposed to a high risk from fluctuations of the currency when pay the borrowing. Foreign exchange risks strategies and techniques in managing the risks has become very important to international companies, while the risk of borrowing becoming low when the fluctuation of exchange rate is positively linked to income in the company. Due to the globalization, the exchange rate movements, deepening entered the financial markets. And also, have been more important for both the financial institutions and the real sector, also for non-profit organization concerning the exchange rat risk for both assets and liability. Management of exchange rate risk exposure affecting the competitiveness of the companies. The research focusing on the effect of exchange rate volatility on the company profits and evidence from Turkey. The effect of exchange rate fluctuations on firm performance are negatively rely on the total sales. When the companies have a high share of exports, are more vulnerable to exchange rate fluctuations, a low exporting firms are more control the liability dollarization after the crises. The recently positive correlation of liability dollarization with the export ratio and the firm size may be limiting the risk. The finding of this study suggest that, however of the improvement of the leverage ratios and interest rate risk, after 2001 financial crises in Turkey, liability dollarization and short maturity structure of debt are still appear to be the main sources of fragility in Turkish corporate sector against external upcoming financial shocks. After the 2001 a financial crises, the private companies in Turkey are like to borrow from abroad capital markets more than in comparison to local markets in order to achieve low interest rate on borrowing. Since 2010, the argument about the importance of choosing effective exchange rate regimes in Turkey cannot be ignored as of the size of risk that the country endure it and the affect in the political stability, also influence the developing the finance method, and the construction sectors. The goal of this research is to measure the effect of exchange rate volatility and the affection on the profitability, also to give the ways how to measure the ratios that used by the companies to control the risk of volatility, also this research discussed the types of derivative instrument used by the companies in order to minimize the risk of exchange rate volatility. The goal of this research is to highlight the riskiness of borrowing abroad and how it can affect the company profitability. This paper is give a solution in order to avoid this risk by using a derivative market while borrowing through foreign currency. The research provide the methods and ways firms can apply in order to be in safe against the volatility of exchange rate. The data gathered and collected from the financial statement of one of the biggest construction company in Turkey called ENKA Company, which analyzed to measure the ratios and test the changes of effective interest rate and measure the DuPont system to test the company ability to pay the borrowing and avoid the risk. This research is prepared in two main parts; the first part, takes and reviewed the relevant literature of the foreign currency systems, hedging policies of the companies, the derivative instruments, hedging currency risk with a financial derivative, reviewed the Turkish economic, followed by analyzing the financial statement one of the biggest companies in Turkey. Finally, it is concluded that according to analyzed financial statement of ENKA corporation for the period 2011-2017 found 2017 the company obtain the highest borrowing, and this affecting the leverage ratios and the company capability to pay the loan, it is suggest for the company to use derivative instrument in order to avoid the exchange rate fluctuations. Keywords: Exchange Rate Risk, Foreign Currency Loans, Borrowing Risk, Hedging, Future Markets, Industry Protection, Turkish's Economy, current account deficit, international investment position.