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Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure

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

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% to 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14041.

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Date of creation: 01 Jan 2009
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Handle: RePEc:pra:mprapa:14041
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