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

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Listed author(s):
  • 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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(09)00206-2
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 95 (2010)
Issue (Month): 2 (February)
Pages: 148-173

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Handle: RePEc:eee:jfinec:v:95:y:2010:i:2:p:148-173
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

Keywords: Competition Hedging FX exposure Derivatives International finance;

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Find related papers by 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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