Covid-19 and its Impact on Multinational Enterprises : A Modified Value at Risk Approach

Multinational enterprises (MNEs) operating across different currencies are exposed to exchange rate risk. They may utilize a variety of tools to mitigate that risk. While there are different types of exchange rate risk, this study focuses specifically on the transaction exposure of cash flows denominated in the currencies of seven different developed countries. The “modified” Value-at-Risk (MVaR) model is employed to estimate the maximum one-period losses during the eighteen months prior to the onset of the Covid-19 pandemic and, in addition, the maximum one-period losses during the eighteen months following the onset of the Covid-19 pandemic. The predicted losses using MVaR are then compared with the actual ex-post results. Our objective is to analyze the extent of the transaction exposure and provide practical insights to MNEs as they decide whether or not to hedge this risk. This study is noteworthy because it compares the pre-Covid-19 and post-Covid-19 time periods