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Adjusting Stock Market Values to Exchange Rate Exposure: The Case of ASTRA, SCA and STORA

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  • Rolseth, Lars

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    Abstract

    Europe's two largest forest product companies SCA and STORA are located in Sweden. One of the largest firms in Sweden is ASTRA, which is a pharmaceutical company. In this paper I analyze how the variance of these firms' values and their stock returns sensitivity to exchange rates and interest rates are affected by different hedging strategies. First are new share price series constructed there gains and losses due to not undertake any hedging practices for transaction and translation exposure are realized. There after are the exposure coefficients obtained from the adjusted share price compared to the exposure coefficients obtained using the firms core share price as a dependent variable. The results show that SCA and STORA manage to reduce the exchange rate exposure significantly, but that both SCA and STORA´s stock return are still sensitive to contemporaneous changes in exchange rates. The linear multiple regression method was unable to detect any significant exchange rate exposure for ASTRA. However, the hedging of translation and transaction exposure do not necessarily imply that the variance of the firm's value is reduced.

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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 6.

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    Length: 24 pages
    Date of creation: 07 Oct 1998
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0006

    Contact details of provider:
    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Keywords: Transaction exposure; Translation exposure; Hedging strategies;

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    1. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
    2. Lars Oxelheim & Clas Wihlborg, 1995. "Measuring macroeconomic exposure: The case of Volvo Cars," European Financial Management, European Financial Management Association, vol. 1(3), pages 241-263.
    3. Mello, Antonio S. & Parsons, John E. & Triantis, Alexander J., 1995. "An integrated model of multinational flexibility and financial hedging," Journal of International Economics, Elsevier, vol. 39(1-2), pages 27-51, August.
    4. Sweeney, Richard J & Warga, Arthur D, 1986. " The Pricing of Interest-Rate Risk: Evidence from the Stock Market," Journal of Finance, American Finance Association, vol. 41(2), pages 393-410, June.
    5. Khoo, Andrew, 1994. "Estimation of foreign exchange exposure: an application to mining companies in Australia," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 342-363, June.
    6. Jongmoo Jay Choi & Anita Mehra Prasad, 1995. "Exchange Risk Sensitivity and Its Determinants: A Firm and Industry Analysis of U.S. Multinationals," Financial Management, Financial Management Association, vol. 24(3), Fall.
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