Foreign Exchange Exposure of Korean Firms

Ji-Seon Kim

doi:10.11644/kiep.jeai.2002.6.2.95

Abstract

The purpose of this study is to examine the relationship between the movements of exchange rate and value of Korean firms, so-called foreign exchange rate exposure using newly devised model to find the strong evidence. I use weekly data on Korean Firms that are listed on Korea Stock Exchange (KSE) for the period from January 1997 to December 2000. I find that about 70% Korean Firms are actually exposed to Won-dollar exchange rate movement at 10% significance level and these results are substantially different from the previous empirical study where little statistical significance was found. In comparing the foreign exchange exposures with three different exchange rates, in Won-dollar and Won-yen exchange exposures, value of Korean firms is positively related to depreciation of Korean Won and negatively related to depreciation of Korean Won with Won-euro exchange exposure. With magnitude of three exposures, results can be interpreted that Dollar exposure seems to be the most significant among three foreign exchange exposures and Korean Firms' value is more sensitive to Won-dollar exchange rate. I also find that exchange exposure is strongly related to firm size and industry especially Electricity & Gas industry is most significantly related.

Highlights

In the early 1970s, the U.S government abandoned the fixed exchange rate system and adopted floating exchange rate regime
Returns: Weekly individual firms’ rate of returns that are dividend and stock-split adjusted are taken from Korea Stock Research Institute (KSRI) that is consistent with what is used in Dominguez and Tesar (2001)
No of firms with significant at 10% 1(25%) 2(67%) 28(57%) 40(58%). This empirical study investigated the relationship between exchange rate movement and value of firms, so-called foreign exchange exposure, of Korean Firms

Summary

Introduction

In the early 1970s, the U.S government abandoned the fixed exchange rate system and adopted floating exchange rate regime. The statistical inactivity is because, first, most of the previous empirical studies estimating the foreign exchange exposure focused on economy-leading countries, which have small portion of foreign operations. The purpose of this study is to estimate Korean firms’ foreign exchange exposure level using foreign exchange rate especially KRW-USD rate. Since dominant portion of Korean firms’ international transactions are denominated in the U.S dollar, the KRW-USD exchange rate would be relevant.. To mitigate the correlation problem among independent variables, newly devised regression model, which excludes factors having effects on exchange rate movement from the market return, was used.

Defining Exchange Rate Exposure

Data Set

Empirical Study

Determinant of Exchange Exposure

Findings

Conclusions