Foreign Exchange Risk Management Practices in International Businesses

Abstract

This study systematically reviews the literature on foreign exchange risk management in international businesses, focusing on how firms design and implement hedging strategies to protect and enhance firm value. Foreign exchange risk is a major strategic challenge for companies with extensive foreign sales and multi-currency operations, where exchange rate volatility affects cash flows, profitability, and market valuation. Using a systematic literature review approach, the study synthesizes evidence on financial derivatives such as forwards, swaps, options, and foreign currency debt, as well as operational techniques including natural hedging, pricing policies, and geographic diversification. The findings indicate that markets generally reward active foreign exchange risk management, although the value premium differs across countries, sectors, and firm characteristics. Governance structures, ownership patterns, access to financial markets, and managerial risk attitudes emerge as key determinants of hedging decisions. However, the relationship between hedging and foreign exchange exposure is not always positive, with evidence of over-hedging, misaligned hedge ratios, and selective or speculative hedging. Overall, effective foreign exchange risk management depends on aligning instruments with underlying exposures, supported by strong corporate governance and integration within broader enterprise risk management frameworks.