The management of foreign exchange risk in Maltese car importation companies

Abstract

PURPOSE – The purpose of this study is to assess the level of foreign exchange risk in Maltese car importation companies, to analyse how and why these companies manage such risk and to determine how the current approach to such risk can be improved. DESIGN – A qualitative approach was adopted to achieve the research objectives. Semistructured interviews were conducted with 17 Maltese car importation companies and with 3 financial institutions. FINDINGS – The study revealed that Maltese car importation companies are exposed to foreign exchange risk. Most of these companies manage foreign exchange risk by means of either Internal hedging techniques or External hedging techniques or both. Reasons for managing this risk were to have cash flow stability and to reduce costs. CONCLUSIONS – The management of foreign exchange risk is important in Maltese car importation companies in order to safeguard profitability and to ensure stable cash flows. Formal foreign exchange risk management plans should be considered by those companies which do not have such a plan. Moreover, education is important in order to increase knowledge on foreign exchange risk, thus improving the current approach to such risk. VALUE - It is hoped that this study contributes towards raising awareness of the importance of managing foreign exchange risk effectively. Good foreign exchange risk management can help in improving the financial performance of Maltese car importation companies. In light of this, it is important for parties such as the financial institutions and the associations representing car importation companies, amongst others, to provide more information on foreign exchange risk.