Behavioral Biases in Managing Foreign Exchange Risk

DOI

10.2991/978-94-6463-888-2_11How to use a DOI?

Keywords

behavioral finance; foreign exchange (FX) risk; cognitive bias

Abstract

Behavioral finance theory proposes that cognitive biases, like overconfidence, loss aversion, and anchoring, have a strong impact on corporate decision-making. This paper explores their impact on foreign exchange (FX) risk management through three real-life case studies involving large multinational and Chinese firms. Each case identifies the prevalent behavioral bias linked to managerial actions and analyzes its consequences. The cases include Volkswagen’s 2003 partial hedging strategy (anchoring and overconfidence), CITIC Pacific’s speculative currency bets in 2008 (overconfidence and “gambling” behavior), and Chinese airlines’ under-hedging during the 2014 renminbi volatility (anchoring and loss aversion leading). This article draws on financial reports, media coverage, and academic research to demonstrate how biased decisions led to sub-optimal FX risk management and significant financial losses. The implications for corporate risk management practices are summarized, with emphasis on the importance of recognizing and mitigating behavioral biases.

Copyright

© 2025 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Ziqi Cao
PY  - 2025
DA  - 2025/12/03
TI  - Behavioral Biases in Managing Foreign Exchange Risk
BT  - Proceedings of the 2025 7th International Conference on Economic Management and Cultural Industry (ICEMCI 2025)
PB  - Atlantis Press
SP  - 84
EP  - 92
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-888-2_11
DO  - 10.2991/978-94-6463-888-2_11
ID  - Cao2025
ER  -