The authors would like to express their heartfelt thanks to the following individuals for having contributed towards the final product: John Fraser, Hydro One Networks Inc.; Delroy Hunter, University of South Florida; Linus Svensson, KPMG; Fredrik Ericsson, KPMG; Jörgen Carlsson, Lund University.

Håkan Jankensgård obtained his MSc in Finance from Lund University, Sweden, in 2001, after which he took up a position as risk manager at Norsk Hydro ASA, at the time a Norwegian industrial conglomerate. This task involved developing the company's corporate risk management programme and building a risk model to support management's strategic decision-making. Beginning in 2004 he worked as an independent consultant in risk management, specializing in developing decision-support tools that quantify firms' risk‐return profile as a function of corporate policies.

Simultaneously with his career as a consultant, Dr Jankensgård pursued a PhD at Lund University, which was completed in 2011. His doctoral thesis is entitled Essays on Corporate Risk Management and consists of seven studies on various aspects of risk management in firms. The thesis was awarded the Jan Wallander and Tom Hedelius Stipend, which made it possible to focus exclusively on research for three years. During this time, Dr Jankensgård deepened his research into firms' risk management strategies but also broadened it to cover various other topics in finance, such as the financing of corporate investment, the effects of information asymmetries, the role of corporate ownership, and volatility in financial markets.

In 2016 Dr Jankensgård became Associate Professor in Corporate Finance at the Department of Business Administration, Lund University. He continues to publish in prestigious academic journals, whilst also teaching Master's-level courses in corporate risk management and valuation. His main research interests are why and how firms use financial derivatives to manage risk, and developing applied frameworks for managing risk that connect the theory of corporate risk management with practice.

Alf Alviniussen graduated from the Norwegian School of Economics and Business Administration, then started work at Norsk Hydro ASA, Oslo, Norway, as an assistant treasurer in 1969. In the following decades the company transformed from mainly a local fertilizer producer to also become a global conglomerate comprising crude and refined oil, aluminium and magnesium, petrochemicals, salmon farming, and so on. About 10–15 years ago the company was gradually split up. Today, aluminium products and hydroelectric power are the primary businesses.

In 1980 Mr Alviniussen was appointed group treasurer, a position he held for more than 20 years. From 1986 his responsibilities also included being president of Hydro Finans, an internal bank for the group. This internal bank carried out a variety of treasury operations and had employees in 12 countries.

As treasurer, Mr Alviniussen was heavily involved in international merger and acquisition projects, as well as greenfield projects. These growth activities put a major strain on treasury, not only from a funding and risk management perspective, but also in the integration of treasury operations, cash management, and relations to banks.

In 2001 Mr Alviniussen took over a position as senior vice president of corporate finance, heading financial planning and risk management, a position he held until retirement in 2011. Thereafter he has acted as a consultant within finance and treasury. From 2013 to 2016 Mr Alviniussen was appointed a member of the Banking Stakeholder Group of the European Banking Authority (EBA), and held a similar position in the European Insurance and Occupational Pensions Authority (EIOPA) in 2016. Both institutions are part of the European System of Financial Supervisors.

Lars Oxelheim is Professor of International Business and Finance at the School of Business and Law, University of Agder, Norway and at Lund University, Sweden. He is affiliated to the Research Institute of Industrial Economics (IFN), an honorary professor at Fudan University, Shanghai, and founding chairman of the Swedish Network for European Studies in Economics and Business (SNEE).

Dr Oxelheim's research interests are in the area of the interplay between the firm and its macroeconomic environment, encompassing economic and financial integration as well as managerial aspects, corporate governance, and risk management. Dr Oxelheim's has authored, co-authored, or edited some 45 research books and is the author of a large number of research articles published in international business, finance, and economic journals. He has been awarded several national and international awards for his research.

Dr Oxelheim's is an active member of several international research networks and serves on the editorial board of a number of journals. He is a delegate of the Royal Swedish Academy of Engineering Sciences (IVA), the Royal Society of Letters at Lund, and elected fellow of the European International Business Academy (EIBA).

Foreign exchange risk management (FXRM) is one of those topics that one never stops learning new things about. It is so complex and oftentimes counterintuitive that a firm grip on it keeps eluding us – even after a sustained effort over many years. Surprises and ‘aha’ moments continue to turn up even well after we have begun to think of ourselves as somewhat experienced and knowledgeable in the area. Nor does it take a very large business operation for FX exposures to become so intricate that our common sense and back‐of‐the‐envelope calculations fail to reliably guide us.

Managers intent on managing exposures to FX may, given these limitations of our intuitive assessments, seek guidance in the literature. The available texts on FXRM generally fall into one of two main categories. One is the analysis of the risk management decision in mainstream academic finance. Textbooks in international finance, for example, fall into this category. The cases used have in common that they take place in a stylized setting that abstracts away from various real‐world complexities: the exposures are known; there is no uncertainty about any decision parameter; there are no side‐effects due to the accounting of the transactions; no distracting self‐interest on the part of the decision‐makers. Instead, the focus is on laying bare the principles that dictate the correct decision from an economic perspective. The usefulness of this approach lies in the fact that it identifies some core determinants of optimal decision‐making under uncertainty. But simplifying away so many of the factors that actually matter is also a limitation; the decision situation is hardly ever served up so neatly in the real world.

The second main category of writing on FXRM are books and online ‘guidance papers’ on hedge accounting. These works are of a technical nature, dealing with the complicated and arcane accounting rules that surround the use of derivatives. The issue of how to construct and execute hedging positions in light of these standards has, it seems, taken on a life of its own. A broader discussion about the purpose of FXRM and how it relates to overall corporate performance is generally lacking. It is simply taken for granted that the derivative is desirable: it is all about the details.

What prompted us to write this book was the feeling that there was a need for something that finds a balance between analysing the economics of the risk management decision, on the one hand, and a reasonable discussion about the accounting consequences of alternative courses of action, on the other hand. The present book, therefore, aims to take the golden middle path. We have been motivated by a desire to present the economic principles that should guide FXRM, while being mindful of the accounting and organizational realities that face real‐world decision‐makers.

In particular, it is naïve to think that performance numbers impacted by accounting rules do not matter. The view that ‘it is just accounting’ is simply not realistic. The reality for most managers is a never‐ending attention on numbers that is heavily influenced by these accounting rules. However, letting the accounting considerations determine how we go about FXRM would be placing the cart before the horse.

Instead, the book outlines an integrated perspective that re‐examines and challenges the received wisdom about FXRM and its role in the corporation. By ‘integrated’ we mean measuring and managing the impact of FX on multiple levels of performance, arguing that the ways in which FXRM simultaneously affects cash flow, net income, and the balance sheet must be thoroughly understood. Integrated also refers to the way the firm organizes the FXRM function. Rather than delegating FX policy to the treasury department, as has been the case traditionally, this book envisions managing FX exposures in a board‐supervised process for integrated risk management. This entails, among other things, choosing the FX policies that achieve the best risk–return profile for the firm as a whole, considering other risk exposures as well as important performance targets, rather than letting them be determined in a ‘silo’ context based on a narrow and limited view of corporate performance.

While the book aims to be an actionable guide to decision‐making, we draw on the latest academic research in corporate risk management to accomplish this goal. The key insights from several decades of research are presented in a simple and accessible manner. The authors are also able to draw on their own research on risk management. Lars Oxelheim pioneered the study of corporate exposure to macroeconomic risk, including foreign exchange, in the 1980s, and has since regularly published empirical investigations and methodological advances on this topic. Håkan Jankensgård has researched extensively into why and how firms manage risks and, together with Alf Alviniussen, developed risk management frameworks that bridge theory and practice. Alf Alviniussen also brings insights from over 40 years of experience from leading positions in treasury and risk management in Norsk Hydro ASA, then an industrial conglomerate, now a leading integrated aluminium producer.

The book should appeal to any business professional who has some responsibility for, or contact with, performance numbers affected by FX fluctuations. Often, firms struggle to make sense of the various ways in which FX influences the numbers they present. Providing a clear and convincing explanation of the mechanisms behind these effects creates a better understanding of how the firm's performance is actually developing.

The book will also enable professionals to take a more proactive approach to FXRM. The ultimate goal is improved decision‐making. We undertake a comprehensive review of the various benefits of FXRM, thus building up the ‘business case’ for a systematic effort aimed at managing the firm's risk profile. Unlike many texts available on risk management, however, we also present a realistic picture of the costs related to FXRM, allowing for a trade‐off between the pros and cons. Ultimately, there should be a convincing case to be made that the benefits are larger and that FXRM leaves the firm's shareholders better off.

The book should also appeal to students of business administration who seek a better understanding of corporate performance and how it is exposed to FX risk. It could be a valuable complement to textbooks in university‐level courses on finance or risk management. Our focus has been on developing a narrative aimed at ‘connecting the dots’, and putting the various parts of FXRM in a broader perspective. These features of the book should enhance the student's understanding of the subject matter compared to textbooks, which by necessity are more fragmented. For the reasons discussed above, it also serves to bridge the two worlds of finance and accounting, which rarely get a unified treatment at universities.

FXRM is an exciting and intellectually stimulating topic. It is also of considerable practical importance. We feel confident in predicting that anyone who studies and masters the principles outlined in this book will quickly become highly appreciated for being able to provide clear answers to the often puzzling FX‐related questions that are, at frequent intervals, brought up by various people in the organization. After reading this book, be prepared to become the go‐to person.

• Adjusted net monetary position The net monetary position adjusted for items that are unexposed from a net income perspective due to the functional currency being identical to the transaction unit
• AL Assets and liabilities
• CTGL Currency translation gains and losses (relating to non‐monetary assets, to be reported in other comprehensive income)
• ERM Enterprise risk management
• Foreign currency Any currency other than the home currency
• Functional currency The currency in which a legal unit measures and reports its financial performance
• FVA Fair value accounting
• FX Foreign exchange: the need to convert units of one currency into units of another currency
• FXGL Foreign exchange gains and losses (relating to monetary assets, to be reported in net income)
• FXRM Foreign exchange risk management
• GL Gains and losses
• Home currency The currency in which the corporate group measures and reports financial performance. That is, the functional currency of the parent company
• IRM Integrated risk management
• Monetary asset/liability An asset or liability with a fixed number of units of currency to be received or paid
• Net AL position The sum of all assets denominated in a foreign currency net of the sum of all liabilities denominated in that currency
• Net monetary position The sum of all monetary assets denominated in a foreign currency net of the sum of all monetary liabilities denominated in that currency
• OCI Other comprehensive income
• PPE Property, plant, and equipment (net of accumulated depreciation)
• Transaction currency The currency in which a transaction is executed. It is also the currency in which a monetary AL is denominated. If a company takes up a loan in US dollars, the dollar is the transaction currency