Foreign exchange risk management practices of companies in Turkey

ABSTRACT In 1970's, the Bretton Woods monetary system collapsed and was replaced by the floating exchange rate standard. With currencies floating freely, the lack of stability in exchange rates has occured in major currencies. Volatility in exchange rates can cause serious problems not only just for companies dealing with foreign operations, but also for companies operating in domestic markets. Unexpected exchange rate movements have a profound effect on a company's competitive position and profitability. Companies have to realize that they can lose substantial sums of money by neglecting the potential risk arising from unexpected movements in exchange rates. There is an urgent need for almost all companies to hedge themselves against foreign exchange risk and formulate foreign exchange risk management policies. In this study, we measure the foreign exchange exposure and examine the foreign exchange risk management practices of companies operating in the Turkish economy. Throughout this study, the results obtained by using statistical methods are being compared, where appropriate, with foreign exchange risk management techniques as prescribed in the literature on foreign exchange risk management and empirical results of earlier related studies. The plan of this study is as follows: Chapter 1 is an introduction part. It is devoted to the statement of the problem, the aim of the study and the plan. In chapter 2, the discussion focuses on some basic definitions of exchange rates, foreign exchange markets, also factors which effect foreign currency demand and supply, foreign exchange risk and exposure. rv