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The Effects of Industry Structure on Economic Exposure

  • Richard C. Marston
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    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.

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    File URL: http://www.nber.org/papers/w5518.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5518.

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    Date of creation: Mar 1996
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    Publication status: published as Marston, Richard C. "The Effects Of Industry Structure On Economic Exposure," Journal of International Money and Finance, 2001, v20(2,Apr), 149-164.
    Handle: RePEc:nbr:nberwo:5518
    Note: IFM
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    1. 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.
    2. 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.
    3. Kenneth A. Froot & Paul Klemperer, 1988. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
    4. 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.
    5. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
    6. 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.
    7. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    8. Christine R Hekman, 1985. "A Financial Model of Foreign Exchange Exposure," Journal of International Business Studies, Palgrave Macmillan, vol. 16(2), pages 83-99, June.
    9. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    10. Kenneth A. Froot, 1993. "Currency Hedging over Long Horizons," NBER Working Papers 4355, National Bureau of Economic Research, Inc.
    11. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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