A Simple Model of Foreign Exchange Exposure
Foreign exchange exposure refers to the sensitivity of a firm's cash flows to changes in exchange rates. This study develops a model of foreign exchange exposure dependent on only three variables, the percentage of the firm's revenues and expenses denominated in foreign currency and its profit rate. Exposure is estimated for a sample of 103 U.S. firms that participated in the 1998 Wharton/CIBC Survey of Risk Management by U.S. Non-Financial Firms. The study finds that foreign exchange exposure is quite low for a majority of firms in the sample because these firms have been able to match their foreign currency revenues and costs leaving them with little net exposure. Such operational hedges may help to explain why previous studies have found low or negligible levels of exposure when they studied the sensitivity of share prices to foreign exchange rates.
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- 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.
- John M. Griffin & Rene M. Stulz, 1997.
"International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns,"
NBER Working Papers
6243, National Bureau of Economic Research, Inc.
- Griffin, John M & Stulz, Rene M, 2001. "International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 215-41.
- Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
- Marston, Richard C., 2001. "The effects of industry structure on economic exposure," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 149-164, April.
- Shapiro, Alan C, 1975. "Exchange Rate Changes, Inflation, and the Value of the Multinational Corporation," Journal of Finance, American Finance Association, vol. 30(2), pages 485-502, May.
- von Ungern Sternberg, Thomas & von Weizsacker, C C, 1990.
"Strategic Foreign Exchange Management,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 38(4), pages 381-95, June.
- Thomas VON UNGERN-STERNBERG & C.C. VON WEIZSAECKER, 1989. "Strategic foreign exchange management," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8905, Université de Lausanne, Faculté des HEC, DEEP.
- Christine R Hekman, 1985. "A Financial Model of Foreign Exchange Exposure," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 16(2), pages 83-99, June.
- 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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