Title: Multinationals, Hedging, and Capital Structure under Exchange Rate Uncertainty
Reference Number: 1120
Publication Date: April 2005
JEL Classifcation: D81; F23; G32

Udo Broll
Dresden University of Technology

Kit Pong Wong
University of Hong Kong

This paper examines the interplay of the financing and hedging decisions of a risk-averse multinational firm having a wholly-owned foreign subsidiary. Exchange rate risk management of the multinational firm is shown to have direct impacts on its international capital structure decision and on its currency of denomination decision. If a currency forward market exists, the multinational firm will devise its international capital structure so as to minimize the global weighted average cost of capital. Or else the multinational firm has to rely on a money market hedge through issuing more foreign currency denominated debt and less domestic currency denominated debt, thereby resulting in a higher global weighted average cost of capital.

Published in Open Economies Review 17:1 (2006), pp. 103-114.

Key words: Multinationals; Hedging; Capital structure; Exchange rate uncertainty

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Last modified: 01/25/2007