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A Financial Model of Foreign Exchange Exposure

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  • Christine R Hekman

    (Duke University)

Abstract

The paper describes a model of foreign exchange exposure. This is defined as the sensitivity of a specific investment's value in reference currency to changes in exchange rate forecasts. This sensitivity may result because some share of the investment cash flows are denominated in foreign currency. Alternatively, a share of cash flows denominated in reference currency which are affected by future exchange rates can also generate sensitivity.The model integrates a general corporate valuation framework with a theory of expectations and a general model of corporate macro-economic relationships. Its contribution is in generalizing previous models of these relationships. It also provides a link between empirical work, theoretical descriptions of the exchange rate/relative price relationship, and corporate valuation theory.The model implies a fairly rich description of the corporate and economic characteristics which determine exposure. These descriptors may be used to explain differences in the responses to exchange rate changes of different companies, product lines, or industries.© 1985 JIBS. Journal of International Business Studies (1985) 16, 83–99

Suggested Citation

  • Christine R Hekman, 1985. "A Financial Model of Foreign Exchange Exposure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 16(2), pages 83-99, June.
    • Handle: RePEc:pal:jintbs:v:16:y:1985:i:2:p:83-99
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    Citations

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    Cited by:

    1. Gordon M. Bodnar & Bernard Dumas & Richard C. Marston, 2002. "Pass‐through and Exposure," Journal of Finance, American Finance Association, vol. 57(1), pages 199-231, February.
    2. repec:dgr:rugccs:200602 is not listed on IDEAS
    3. Christine Ries, 2001. "Enterprise risk management: Applications of economic modeling and information technology," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 2(2), pages 1-8, September.
    4. Goswami, Gautam & Shrikhande, Milind M., 2001. "Economic exposure and debt financing choice," Journal of Multinational Financial Management, Elsevier, vol. 11(1), pages 39-58, February.
    5. Malik, Farooq, 2021. "Volatility spillover between exchange rate and stock returns under volatility shifts," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 605-613.
    6. Gordon M. Bodnar & M.H. Franco Wong, 2000. "Estimating Exchange Rate Exposures: Some "Weighty" Issues," NBER Working Papers 7497, National Bureau of Economic Research, Inc.
    7. Boyang Miao & Si Zhou & Jing Nie & Zhichao Zhang, 2013. "Renminbi exchange rate exposure: evidence from Chinese industries," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(4), pages 229-250, November.
    8. Muller, Aline & Verschoor, Willem F.C., 2006. "Asymmetric foreign exchange risk exposure: Evidence from U.S. multinational firms," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 495-518, October.
    9. Huang, Roger D. & Stoll, Hans R., 2001. "Exchange rates and firms' liquidity: evidence from ADRs," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 297-325, June.
    10. Suparna Nandy (Pal) & Arup Kr. Chattopadhyay, 2019. "‘Indian Stock Market Volatility’: A Study of Inter-linkages and Spillover Effects," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(2_suppl), pages 183-212, August.
    11. Muller, Aline & Verschoor, Willem F.C., 2006. "Foreign exchange risk exposure: Survey and suggestions," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 385-410, October.
    12. Oxelheim, Lars, 2002. "The Impact of Macroeconomic Variables on Corporate Performance - What Shareholders Ought to Know?," Working Paper Series 571, Research Institute of Industrial Economics, revised 22 Aug 2007.
    13. Kuper, Gerard H. & Lestano, 2007. "Dynamic conditional correlation analysis of financial market interdependence: An application to Thailand and Indonesia," Journal of Asian Economics, Elsevier, vol. 18(4), pages 670-684, August.
    14. Bartram, Söhnke M. & Brown, Gregory W. & Minton, Bernadette A., 2010. "Resolving the exposure puzzle: The many facets of exchange rate exposure," Journal of Financial Economics, Elsevier, vol. 95(2), pages 148-173, February.
    15. Doidge, Craig & Griffin, John & Williamson, Rohan, 2006. "Measuring the economic importance of exchange rate exposure," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 550-576, October.
    16. Oxelheim, Lars & Wihlborg, Clas, 1991. "Accounting for Macroeconomic Influences on the Firm," Working Paper Series 308, Research Institute of Industrial Economics.
    17. Ekta Sikarwar & Ganesh Kumar Nidugala, 2018. "Effect of Central Bank Intervention in Estimating Exchange Rate Exposure: Evidence from an Emerging Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(1), pages 60-95, April.
    18. Bodnar, Gordan M. & Marston, Richard C., 2000. "A Simple Model of Foreign Exchange Exposure," Working Papers 00-3, University of Pennsylvania, Wharton School, Weiss Center.
    19. Williamson, Rohan, 2001. "Exchange rate exposure and competition: evidence from the automotive industry," Journal of Financial Economics, Elsevier, vol. 59(3), pages 441-475, March.
    20. Krapl, Alain & O'Brien, Thomas J., 2015. "Direct versus indirect regression estimates of foreign exchange cash flow exposure," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 103-112.
    21. repec:dgr:rugsom:14029-eef is not listed on IDEAS
    22. Chen, Cherry C. & So, Raymond W., 2002. "Exchange rate variability and the riskiness of US multinational firms: evidence from the Asian financial turmoil," Journal of Multinational Financial Management, Elsevier, vol. 12(4-5), pages 411-428.
    23. Richard C. Marston, 1996. "The Effects of Industry Structure on Economic Exposure," NBER Working Papers 5518, National Bureau of Economic Research, Inc.
    24. repec:dau:papers:123456789/15237 is not listed on IDEAS
    25. Marston, Richard C., 2001. "The effects of industry structure on economic exposure," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 149-164, April.

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