NEW YORK (Commodity Online): Businesses operating in international destinations often face the problem of how currency fluctuations affect their profits. While most international businesses use foreign-exchange hedging to limit currency risk, hotel companies might not need fancy currency hedges. Instead, a new study from Cornell's Center for Hospitality Research (CHR) explains that normal business practices for international hotel operations have a currency-hedging effect.

The study, "Operational Hedging and Exchange Rate Risk: A Cross-sectional Examination of Canada's Hotel Industry," by Charles Chang and Liya Ma, examines the foreign exchange situation of more than 1,000 Canadian hotels. For these hotels, Chang and Ma found that normal rate adjustments based on typical revenue management strategies had the same effect as hotel foreign exchange hedging. The study is available at no charge, at http://www.hotelschool.cornell.edu/research/chr/pubs/reports/2009.html. Chang's research was completed at the Cornell School of Hotel Administration, while Ma--a Cornell graduate--works with the Credit Suisse real estate group.



Currency changes challenge the profitability of international hotel operations. Generally, guests pay in the local currency, but the profits are often repatriated in dollars, euro, or yen. So, when the local currency's exchange value drops, a hotel's profit declines in dollar or euro terms. However, hotels and other companies that use revenue management can adjust rates and effectively gain a foreign currency hedge through normal revenue management.

When international travelers find that a hotel is suddenly "less expensive" to patronize because of a currency change, more travelers stay at the property. At this point, the revenue management system recommends raising the hotel's rates, but those rooms are still effectively a bargain. Revenue per available room further increases through both higher rates and higher occupancy, even after the currency conversion, Chang and Ma found. (Courtesy: PRWeb)

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