IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Exchange Rate Exposure Puzzle

  • Bartram, Söhnke M.
  • Bodnar, Gordon

Based on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the empirical research on nonfinancial firms typically produces fewer significant exposures estimates than researchers ex-pect, independent of the sample studied and the methodology used, giving rise to a situation known as “the exposure puzzle”. This paper provides a survey of the existing research on the exposure phenomenon for nonfinancial firms. We suggest that the exposure puzzle may not be a problem of empirical methodology or sample selection as previous research has suggested, but is simply the result of the endogeneity of operative and financial hedging at the firm level. Given that empirical tests estimate exchange exposures net of corporate hedging, both, firms with low gross exposure that do not need to hedge, as well as firms with large gross exposures that employ one or several forms of hedging, may exhibit only weak exchange rate exposures net of hedging. Consequently, empirical tests yield only small percentages of firms with significant stock price exposures in almost any sample.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/6482/1/MPRA_paper_6482.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6482.

as
in new window

Length:
Date of creation: 04 Oct 2005
Date of revision:
Handle: RePEc:pra:mprapa:6482
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Nguyen, Hoa & Faff, Robert, 2003. "Can the use of foreign currency derivatives explain variations in foreign exchange exposure?: Evidence from Australian companies," Journal of Multinational Financial Management, Elsevier, vol. 13(3), pages 193-215, July.
  2. Bartram, Sohnke M., 2004. "Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 673-699, June.
  3. Sohnke M. Bartram & G. Andrew Karolyi, 2002. "The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures," Finance 0207005, EconWPA, revised 16 Sep 2002.
  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. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Sohnke M. Bartram, 2001. "Corporate Risk Management as a Lever for Shareholder Value Creation," Finance 0108002, EconWPA, revised 10 Aug 2001.
  9. Chen, Cherry C. & So, Raymond W., 2002. "Exchange rate variability and the riskiness of US multinational firms: evidence from the Asian financial turmoil," Journal of Multinational Financial Management, Elsevier, vol. 12(4-5), pages 411-428.
  10. 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.
  11. Söhnke M. Bartram & Gregory W. Brown & Frank R. Fehle, 2009. "International Evidence on Financial Derivatives Usage," Financial Management, Financial Management Association International, vol. 38(1), pages 185-206, 03.
  12. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "Exchange Rate Exposure," NBER Working Papers 8453, National Bureau of Economic Research, Inc.
  13. Christos Pantzalis & Betty J Simkins & Paul A Laux, 2001. "Operational Hedges and the Foreign Exchange Exposure of U.S. Multinational Corporations," Journal of International Business Studies, Palgrave Macmillan, vol. 32(4), pages 793-812, December.
  14. Fatemi, Ali M. & Tavakkol, Amir & Dukas, Stephen P., 1996. "Foreign exchange exposure and the pricing of exchange rate risk," Global Finance Journal, Elsevier, vol. 7(2), pages 169-189.
  15. Gordon M. Bodnar & Gregory S. Hayt & Richard C. Marston, 1998. "1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms," Financial Management, Financial Management Association, vol. 27(4), Winter.
  16. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
  17. Shin, Hyun-Han & Soenen, Luc, 1999. "Exposure to currency risk by US multinational corporations," Journal of Multinational Financial Management, Elsevier, vol. 9(2), pages 195-207, March.
  18. Asprem, Mads, 1989. "Stock prices, asset portfolios and macroeconomic variables in ten European countries," Journal of Banking & Finance, Elsevier, vol. 13(4-5), pages 589-612, September.
  19. Gregory Koutmos & Anna D. Martin, 2003. "First- and Second-Moment Exchange Rate Exposure: Evidence from U.S. Stock Returns," The Financial Review, Eastern Finance Association, vol. 38(3), pages 455-471, 08.
  20. Crabb, Peter R., 2002. "Multinational corporations and hedging exchange rate exposure," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 299-314.
  21. Timothy A Luehrman, 1991. "Exchange Rate Changes and the Distribution of Industry Value," Journal of International Business Studies, Palgrave Macmillan, vol. 22(4), pages 619-649, December.
  22. S. Waite Rawls & Charles W. Smithson, 1990. "Strategic Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(4), pages 6-18.
  23. Bessembinder, Hendrik, 1991. "Forward Contracts and Firm Value: Investment Incentive and Contracting Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 519-532, December.
  24. Williamson, Rohan, 2001. "Exchange rate exposure and competition: evidence from the automotive industry," Journal of Financial Economics, Elsevier, vol. 59(3), pages 441-475, March.
  25. Kent D Miller & Jeffrey J Reuer, 1998. "Firm Strategy and Economic Exposure to Foreign Exchange Rate Movements," Journal of International Business Studies, Palgrave Macmillan, vol. 29(3), pages 493-513, September.
  26. Allayannis, George & Ihrig, Jane, 2001. "Exposure and Markups," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 805-35.
  27. Bartram, Söhnke M., 2008. "What lies beneath: Foreign exchange rate exposure, hedging and cash flows," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1508-1521, August.
  28. Eli Bartov & Gordon M. Bodnar & Aditya Kaul, 1995. "Exchange Rate Variability and the Riskiness of U.S. Multinational Firms:Evidence from the Breakdown of the Bretton Woods System," NBER Working Papers 5323, National Bureau of Economic Research, Inc.
  29. Ibrahimi, Fatemeh & Oxelheim, Lars & Wihlborg, Clas, 1989. "International Stock Markets and Fluctuations in Exchange Rates and Other Macroeconomic Variables," Working Paper Series 244, Research Institute of Industrial Economics.
  30. Kathryn M. E. Dominguez & Linda L. Tesar, 2001. "Trade and Exposure," American Economic Review, American Economic Association, vol. 91(2), pages 367-370, May.
  31. Prasad, Anita Mehra & Rajan, Murli, 1995. "The role of exchange and interest risk in equity valuation: A comparative study of international stock markets," Journal of Economics and Business, Elsevier, vol. 47(5), pages 457-472, December.
  32. 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.
  33. Doidge, Craig & Griffin, John & Williamson, Rohan, 2006. "Measuring the economic importance of exchange rate exposure," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 550-576, October.
  34. Brown, Gregory W., 2001. "Managing foreign exchange risk with derivatives," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 401-448, May.
  35. Di Iorio, Amalia & Faff, Robert, 2000. "An analysis of asymmetry in foreign currency exposure of the Australian equities market," Journal of Multinational Financial Management, Elsevier, vol. 10(2), pages 133-159, June.
  36. Bodnar, G.M. & Dumas, B. & Marston, R.C., 1998. "Pass-Through and Exposure," Weiss Center Working Papers 98-01, Wharton School - Weiss Center for International Financial Research.
  37. Gordon M. Bodnar & M.H. Franco Wong, 2003. "Estimating Exchange Rate Exposures: Issues in Model Structure," Financial Management, Financial Management Association, vol. 32(1), Spring.
  38. Dominguez, K., 1997. "The Dollar Exposure of Japanese Companies," Working Papers 414, Research Seminar in International Economics, University of Michigan.
  39. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  40. Bartov, Eli & Bodnar, Gordon M, 1994. " Firm Valuation, Earnings Expectations, and the Exchange-Rate Exposure Effect," Journal of Finance, American Finance Association, vol. 49(5), pages 1755-85, December.
  41. Jane Ihrig, 2001. "Exchange-rate exposure of multinationals: focusing on exchange-rate issues," International Finance Discussion Papers 709, Board of Governors of the Federal Reserve System (U.S.).
  42. Doukas, John & Hall, Patricia H. & Lang, Larry H. P., 1999. "The pricing of currency risk in Japan," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 1-20, January.
  43. Allayannis, George & Ofek, Eli, 2001. "Exchange rate exposure, hedging, and the use of foreign currency derivatives," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 273-296, April.
  44. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 363-376, September.
  45. Guay, Wayne & Kothari, S. P, 2003. "How much do firms hedge with derivatives?," Journal of Financial Economics, Elsevier, vol. 70(3), pages 423-461, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:6482. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.