To Hedge or Not to Hedge

Abstract

This article studies whether foreign exchange risk can be reduced by operational controls. Specifically, revenue management practices for five international markets are analyzed over a period of more than six years. Results show that ADR (average daily rate), RevPAR (revenue per available room), and occupancy improve in weak currency environments to make up for losses resulting from currency translation. The reverse is also true. That is, occupancy declines in strong currency environments to make up for gains in exchange. In other words, when a weak local currency threatens dollar-denominated earnings, managers can make up for it by increasing ADR without reducing occupancy, thereby increasing RevPAR. The result is significantly less exposure to foreign exchange risk than implied by traditional hedging arguments.