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The Effects of Industry Structure on Economic Exposure

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  • Richard C. Marston

Abstract

A firm is subject to `economic exposure' if changes in exchange rates affect the firm's value, as measured by the present value of its future cash flows. This paper shows that in many forms of competition, including the most commonly studied case of monopoly, the economic exposure of an exporting firm is simply proportional to the firm's net revenues based in foreign currency. So the firm's hedging strategy is simple: sell foreign currency futures equal to the value of its net revenues in foreign currency. This simple result breaks down under some, but not all, forms of competition between the exporting firm and local firms. In that case, the exporting firm needs to know about the price elasticity of its product demand and its marginal cost in order to assess its exposure to exchange rates. So its hedging strategy also requires detailed knowledge of demand and cost conditions. The key determinant of economic exposure, therefore, is the competitive structure of the industry in which a firm operates.

Suggested Citation

  • Richard C. Marston, 1996. "The Effects of Industry Structure on Economic Exposure," NBER Working Papers 5518, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5518
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    References listed on IDEAS

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    1. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-654, September.
    2. Kenneth A. Froot, 1993. "Currency Hedging over Long Horizons," NBER Working Papers 4355, National Bureau of Economic Research, Inc.
    3. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
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    6. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    7. Bernard Dumas, 1992. "Short and long-term hedging for the corporation," Working Papers hal-00611588, HAL.
    8. 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.
    9. 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.
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    Citations

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    Cited by:

    1. Gordon M. Bodnar & Bernard Dumas & Richard C. Marston, 2002. "Pass-through and Exposure," Journal of Finance, American Finance Association, vol. 57(1), pages 199-231, February.
    2. Jose Campa & Linda S. Goldberg, 1997. "The Evolving External Orientation of Manufacturing Industries: Evidence from Four Countries," NBER Working Papers 5919, National Bureau of Economic Research, Inc.
    3. Rene M. Stulz & Rohan G. Williamsom, "undated". "Identifying and quantifying exposures," Research in Financial Economics 9614, Ohio State University.
    4. Gao, Ting, 2000. "Exchange rate movements and the profitability of U.S. multinationals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 117-134, February.
    5. Friberg, Richard & Nydahl, Stefan, 1997. "Openness and the exchange rate exposure of national stock markets - a note," SSE/EFI Working Paper Series in Economics and Finance 195, Stockholm School of Economics.
    6. Huang, Roger D. & Stoll, Hans R., 2001. "Exchange rates and firms' liquidity: evidence from ADRs," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 297-325, June.
    7. Friberg, Richard, 1996. "On the Role of Pricing Exports in a Third Currency," SSE/EFI Working Paper Series in Economics and Finance 128, Stockholm School of Economics.
    8. Dekle, Robert, 1998. "The yen and Japanese manufacturing employment," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 785-801, October.

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    JEL classification:

    • F3 - International Economics - - International Finance

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