Time-Variation in the Exchange Rate Exposure of Swiss Firms

Abstract

This study measures the exchange rate exposure of Swiss firms for its most relevant currencies and assesses its time-variation. I find that the firm-level exposure varies considerably over time. Differences in operational possibilities to mitigate the exposure cannot explain this variance, while some macroeconomic variables are able to capture the time-variation at least partly. I further show that volatility in exposures reduces the hedging effectiveness and leads thus to wrong decisions with regard to hedging activities. Trying to hedge an asset exposed to exchange rate movements can increase the variance of its returns rather than decreasing it.