Mc Donalds

Case study: Currency hedging of ABB

Bachelor Thesis in Banking and Finance

Swiss Banking Institute University of Zurich Prof. Dr. Alexander Wagner

Author: Andreas Ita Submission date: May 25, 2009

Executive Summary

Currency hedging of non-financial firms is a controversial issue in theory and practice. Disciples of neoclassical theories argue that firms should not hedge their market risk exposure as hedging does not create shareholder value. In contrast, corporate hedging theory provides a number of arguments why hedging can increase the firm value. However, empirical studies often fail to verify theoretical motives for hedging. In practice, currency hedging is widely employed by non-financial firms. This Bachelor Thesis is designed as a case study and examines the currency hedging of ABB Group, a large multinational company with headquarters in Switzerland. The firm is a global market leader in power and automation technologies and is active in more than 100 countries worldwide. For 2007 the group reached revenues of approximately 29.2 billion U.S. dollar. The company's market value on December 31, 2007 was around 66.1 billion U.S. dollar. Problem Literature on corporate hedging disregards that in multinational groups currency risk typically exists on the level of foreign subsidiary firms as well as on consolidated group level. This thesis describes the implementation of currency hedging within ABB Group and examines the foreign exchange rate exposure on both entity and group level. Findings are connected to established hedging theories. Secondly, this thesis attempts to determine ABB Group's foreign currency exposure from published company information. In contrast to conventional financial analysis which is usually focused on the impact of exchange rate changes on earnings or balance sheet values, this study intends to determine the effects on the firm value. Approach Literature on currency hedging is very fragmented and often limited to specific...