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Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach

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  • RICHARD FRIBERG
  • MATTIAS GANSLANDT

Abstract

How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different brands face very different exchange rate risks.

Suggested Citation

  • Richard Friberg & Mattias Ganslandt, 2007. "Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach," Journal of Finance, American Finance Association, vol. 62(5), pages 2475-2502, October.
    • Handle: RePEc:bla:jfinan:v:62:y:2007:i:5:p:2475-2502
    DOI: 10.1111/j.1540-6261.2007.01281.x
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    Cited by:

    1. Chung Y. Peter & Zhou Zhong-guo, 2012. "The Pricing of Time-Varying Exchange Rate Risk in the Stock Market: A Nonparametric Approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(1), pages 1-33, January.
    2. Bleuel, Hans-H., 2008. "Ein Analyseraster zur Bestimmung langfristiger Wechselkursrisiken von Unternehmen dargestellt am Beispiel der US-Dollar-Abwertung," Duesseldorf Working Papers in Applied Management and Economics fobe02, Duesseldorf University of Applied Sciences.
    3. Friberg, Richard & Huse, Cristian, 2012. "How to use demand systems to evaluate risky projects, with an application to automobile production," CEPR Discussion Papers 9266, C.E.P.R. Discussion Papers.
    4. Jacobsen, Brian J. & Liu, Xiaochun, 2008. "China's segmented stock market: An application of the conditional international capital asset pricing model," Emerging Markets Review, Elsevier, vol. 9(3), pages 153-173, September.
    5. Friberg, Richard, 2019. "All the bottles in one basket? Diversification and product portfolio composition," CEPR Discussion Papers 14119, C.E.P.R. Discussion Papers.
    6. Bleuel, Hans-H., 2008. "Ein Analyseraster zur Bestimmung langfristiger Wechselkursrisiken von Unternehmen dargestellt am Beispiel der US-Dollar-Abwertung," Duesseldorf Working Papers in Applied Management and Economics 02, Duesseldorf University of Applied Sciences.

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