Global Finance 371value of the Company’s investment in foreign subsidiaries resulting from a 10%
adverse change in foreign-currency exchange rates at December 31, 1999 would
amount to $5.5 million.^21Titan International disclosed no currency hedging activities. This is not sur-
prising given that the $5.5 million loss in investment value amounts to only
about 2% of its total shareholders’ equity at the end of 1999. Beyond this, as
we will see in the subsequent discussion of the translation of the statements of
foreign subsidiaries, the potential reduction in Titan’s investment value does
not affect either earnings or cash f low.^22 This, combined with the immaterial
size of the potential loss in value, can easily explain the absence of hedging
activity.
What Are Hedging Motivations and Objectives?
Much information on hedging motivation is implicit in the information pro-
vided in Exhibits 12.5 and 12.8. Recurrent themes are those of protecting
earnings and cash f low from the potential volatility produced by exchange rate
f luctuations. Information on the ranking of alternative hedging objectives,
from a survey conducted at the Wharton Business School, is provided in Ex-
hibit 12.10. The dominance of the desire to protect cash f lows and earnings is
clearly the dominant motivator for hedging. However, as will be discussed in
the section on translation of the statements of foreign subsidiaries, there is
some level of hedging of balance-sheet exposure.
How Much Exposure Is Hedged?
The extent to which currency exposure is hedged ranges from zero to 100%. It
is common for firms to announce that they simply do not use currency deriva-
tives to hedge against currency risk. However, such firms may have already
reduced currency risk to tolerable levels through natural hedges. Again, the ap-
petite of management for bearing currency risk will in large measure determine
the extent of the hedging. The cost and availability of hedging instruments is
EXHIBIT 12.10 Rankings of alternative hedging objectives.
Percent of Respondents Ranking
Hedging Objective the Objective as Most Important- To manage volatility in cash f lows 49%
- To manage volatility in accounting earnings 41
- To manage market value of the firm 8
- To manage balance sheet accounts or ratios 2
100%
SOURCE: G. Bodnar, G. Hayt, and R. Marston, “The Wharton Survey of Derivatives Usage by U.S.
Non-Financial Firms,” Financial Management, 25(Winter 1996), 114–115.