Operational Hedging and Exchange Rate Risk: A Cross-sectional Examination of Canada’s Hotel Industry
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Chang, Charles; Ma, Liya
Rather than engage in expensive and complicated currency hedging, hotels operating in an international environment can gain similar benefits from their normal operations, including revenue management. An analysis of 1,032 Canadian hotels over a period of over two and one-half years shows that due to exhange rate interactions, ADR, occupancy, and RevPAR increase in weak currency environments, while they decrease in strong environments. As a local currency fluctuates in relation to the dollar, euro, or yen, changes in ADR, occupancy, and (thus) RevPAR offset losses from currency translation in weak environments and modify gains when the currency is strong. When a local currency loses value against the dollar, for instance, travelers consider hotels priced in that currency to be less expensive, even though the nominal price hasn’t changed. Additional travelers who are attracted by "bargain" prices increase occupancy and cause the hotel’s revenue management system to recommend higher rates. Even with higher rates, the hotel’s rates might still be favorable, and the hotel’s revenue per available room would be augmented by both higher room rates and higher occupancy. The implication is that multinational hotel chains have significantly less exposure to foreign exchange risk than implied by traditional hedging practices.
hotels; Canada; revenue management; revenue per available room (RevPAR); average daily rates (ADR); foreign exchange risk
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