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A Financial Model of Foreign Exchange Exposure

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  • Christine R Hekman

    (Duke University)

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    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

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

    Volume (Year): 16 (1985)
    Issue (Month): 2 (June)
    Pages: 83-99

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    Handle: RePEc:pal:jintbs:v:16:y:1985:i:2:p:83-99

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    Cited by:
    1. Oxelheim, Lars & Wihlborg, Clas, 1991. "Accounting for Macroeconomic Influences on the Firm," Working Paper Series 308, Research Institute of Industrial Economics.
    2. 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.
    3. 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.
    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. Bodnar, G.M. & Dumas, B. & Marston, R.C., 1998. "Pass-Through and Exposure," Weiss Center Working Papers 98-01, Wharton School - Weiss Center for International Financial Research.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Richard C. Marston, 1996. "The Effects of Industry Structure on Economic Exposure," NBER Working Papers 5518, National Bureau of Economic Research, Inc.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. 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.

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