Foreign exchange exposure and the pricing of currency risk in equity returns: Some Australian evidence

Abstract

Having regard to the importance of knowing whether equity returns are sensitive to exchange rate changes and if currency risk is priced when making international financial management decisions, the following evidence is provided in this paper. Although equity returns of Australian industries display differential ex post sensitivity to exchange rate movements, evidence from a two factor asset pricing model suggests that equity returns do not include any premium for currency risk borne. One implication of these findings is that corporate hedging of currency exposure may not add value.