In this paper, we examine the foreign exchange exposure of a sample of U. S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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Gary Gorton & Richard Rosen, 1995.
"Banks and Derivatives,"
NBER Chapters,
in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349
National Bureau of Economic Research, Inc.
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