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Resolving the exposure puzzle: The many facets of exchange rate exposure

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  • Bartram, Söhnke M.
  • Brown, Gregory W.
  • Minton, Bernadette A.

Abstract

Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research has not documented such exposures. To examine this discrepancy, we extend prior theoretical results to model a global firm's FX exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges. For a typical sample firm, pass-through and operational hedging each reduce exposure by 10-15%. Financial hedging with foreign debt, and to a lesser extent FX derivatives, decreases exposure by about 40%. The combination of these factors reduces FX exposures to observed levels.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jfinec:v:95:y:2010:i:2:p:148-173
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    More about this item

    Keywords

    Competition Hedging FX exposure Derivatives International finance;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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