Limitations of natural hedging of currency risk

Abstract

This study investigates the effectiveness and limitations of natural hedging as a foreign exchange (FX) risk mitigation tool, using Salvador Caetano Auto África (SCAA) as a case study. The company operates in several African markets, facing a significant exposure to local volatile currencies but only uses a natural hedging strategy instead of relying on financial derivates. An empirical analysis from 2018 to 2024 evaluates how operational practices, such matching, local investment, and centralized management help mitigate FX risk. The findings suggest that, despite operating in highly volatile markets, in the long-term perspective, the company managed to mitigate FX losses to a relative minor level, demonstrating that natural hedging can be a valuable tool when financial derivates are unavailable or impractical. However, the study also highlights the limitations of this approach and recommends the selective use of financial tools – such as forward contracts and FX clauses – that could enhance risk management when viable. The study contributes to the literature on real-world applications of natural hedging and provides practical insights for multinational firms operating in emerging markets.

Date of Award	22 Oct 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Sandra Correia (Supervisor)