An Empirical Case Study of Hedging Strategy on Steel Manufacturing Firms’ Exchange Rate Risk

Purpose This paper focuses on evaluating the foreign exchange risk of Korean steel firms taking into account the changed economic environment after the IMF crisis periods. Annual financial data for the Korean steel firms related to foreign currency denominated transactions was used. Design/Methodology/Approach The analysis was supplemented through case studies of practical firms on the types of foreign currency risk management strategies used from 1997 to 2018. The total analysis period was divided into four periods which cover different economic events. This consists of the IMF crisis (1997-2000), the 1st KRW stabilization period (2001-2006), the global crisis period (2007-2010) and the 2nd KRW stabilization period (2011-2018). Findings Through case investigation and foreign assets leverage estimation process, we found several implications to help manage steel firms’ exposure risk. First, most steel firms’ net assets in foreign currency are estimated at -15.9%. The negative value implies that the profitability of steel manufacturers on their foreign transactions is deficit due to excessive foreign currency denominated debts. Second, the leverage effect of foreign currency denominated assets (FER) of steel companies was estimated at 1.5% over the entire analysis period. A negative FER value implies that the steel manufacturing firms’ operation of foreign currency denominated assets is inefficient in terms of profitability. Research Implications we can find that traditional hedging instruments are not effective through practical case research. Therefore, when considering the changed environment, global managers should consider and develop more effective hedging methods, taking into account a strategic view on risk minimization.