The implications of the Euro for risk management in the manufacturing sector

Abstract

Hedging derivatives, including swaps, forwards and futures can be very effective to hedge against currency risk for import and export business. Before the adoption of the euro, many Maltese firms had to deal with foreign exchange risk when dealing with imports and exports. With the adoption of the euro last January, firms which trade with euro zone countries, should have now, theoretically, eliminated exchange rate risk. So, fewer fluctuations in trading costs and revenues will be experienced. This dissertation seeks to analyse whether Maltese manufacturing firms have been using hedging derivatives prior to euro adoption, and if the use of such tools has increased or decreased from January 2008 onwards. The result of the study showed that the use of hedging instruments is still an ambiguous subject among most firms in Malta. This could mean that prior to euro adoption, when hedging derivatives were needed the most, their use was ignored; thus, such firms could have lost a substantial amount of revenue and this could in turn have meant a loss of competitiveness. Another find was that the majority of the firms within this sector export and import mainly to EU countries and so the importance of derivatives to eliminate currency risk is minimised.