Abstract
The world´s latest decades have been branded by globalization, a process that has integrated the world and made its members more interdependent. Globalization has also expanded firms, who are now operating in several countries, dealing with different currency cash flows and consequently, with the risks of exchange rate changes. Both, Krugman (2009) and Shapiro (2010), agree that changes on exchange rates are due to a combination of several factors including supply and demand of foreign currency, inflation rates, interest rates, economic growth, political and economic risk and also expectations and speculations which are known as psychological factors.
Multinationals need to protect themselves from the fluctuation of the above mentioned factors as they are likely to cause variations on exchange rates impacting severely on the company's expected future cash flows and margins (economic exposure), balance sheet assets and revenues (translation exposure), competitiveness in the local and foreign markets and also in the company's strategies against foreign competitors operating or to operate both locally and abroad. According to the ISDA´s last survey (2009), the most popular tool amongst the largest companies in the world to cope with the above mentioned risks are derivatives, being used by 94% of them.
