Question
What factors determine centralization/decentralization of exchange risk management? Which policy would you advocate for Indian Multinationals? Why?
Answer :
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The centralization or decentralization of exchange risk management in multinational corporations is influenced by a combination of financial, operational, strategic, and organizational factors. Centralization refers to managing foreign exchange risks at the corporate headquarters level, typically through a treasury center, whereas decentralization allows individual subsidiaries or business units to manage their own risks. One major factor determining this choice is the size and complexity of foreign operations. Larger firms with multiple subsidiaries and significant exposure to different currencies benefit from centralization because it allows for a consolidated view of overall risk, netting of positions across subsidiaries, and efficient use of hedging instruments. Smaller firms or those with limited foreign exposure may
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