Determinants of Exchange Rate Risks in the Automotive Industry

Abstract

The thesis details the analysis of foreign currency exposure determinants based on 21 companies in the automotive industry. The analysis confirms theoretical suggestions that the automotive industry is prone to foreign currency exposure and risks being influenced by competition intensity, functional currency, export ratio, geographic distribution of sales and production networks and operational flexibility. Analysis on company size and stock growth potential and volatility is inconclusive. The results are illustrated by a case study on Volvo Cars, Sweden. The combination of factors identified does not provide a clear explanation why some companies are more affected than others and does not allow for extrapolating economic risks in the long run. Asymmetric effects of foreign currency fluctuations on operational cash flows are deduced to result from differing hedging practices influenced by deliberate strategic moves and imperfect information. The review proposes a model of foreign currency exposure shaped by covariating currency risk determinants and hedging practices.