Significant Exchange Rate Exposure Research Articles

Is the exchange rate exposure puzzle really a puzzle? International evidence

PurposeGiven the difficulties in finding significant exchange rate exposure in the extant literature, this paper attempts to resolve the so-called “exposure puzzle” by investigating whether currency movements have any significant impact on international industry returns.Design/methodology/approachThis paper utilizes the multivariate Generalized AutoRegressive Conditional Heteroskedasticity (MGARCH) methodology to estimate both symmetric and asymmetric exchange rate exposures for each industry common across 12 countries simultaneously.FindingsThe empirical results show that exchange rate exposure is not only statistically significant but also economically important based on the estimation of an asymmetric three-factor exposure model using MGARCH methodology. This is an extremely important finding as it suggests that the “exposure puzzle” may not be a puzzle at all once a better methodology is utilized in the estimation.Research limitations/implicationsBecause this study tries to resolve the exchange rate exposure puzzle by focusing on whether exchange rate movements affect ex-post returns as opposed to ex ante expected returns and given the significant exposures with respect to different risk factors found in the study, it is interesting to see if any of these risk factors commands a risk premium. In other words, a natural extension of this study is to test whether any of these risk factors is priced in international industry returns.Practical implicationsThe findings of the study have interesting implications for international investors who would like to diversify their portfolios across different industries and are concerned about whether the unexpected movements in the bilateral exchange rates will affect their portfolio returns in addition to its interest rate and world market risk exposures.Originality/valueThe study utilizes the MGARCH methodology, which has not been fully exploited in the exchange rate exposure literature.

Foreign Exchange Exposure of Indonesian Listed Firms

Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transactions. The exchange rate movements may have an impact on future cash flows, generated by the firm’s production and marketing operations. For example, a rising Indonesian rupiah may result in Indonesian goods becoming more expensive, leading to Indonesian exporters selling less in the future, resulting in unfavourable future cash flows. Lower future cash flows mean the firm’s stock valuation may decline and investors may not be attracted to investing in the firm’s stock. In this paper, we examine the effect of exchange rate movements on Indonesian listed firms’ stock prices using a multivariate model with six bilateral exchange rates. We further add a generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) model for each of 100 Indonesian listed firms’ monthly closing prices from the period of January 1994 through to November 2015, and the GARCH (1,1) results are summarized and presented in Tables 1 – 4 , 7 and 8 . We find a total of 80 per cent of our sample firms to have significant exchange rate exposure. The overall results show that most of the Indonesian listed firms under study are exposed to Japanese yen, Great Britain pound and Malaysian ringgit. We posit that this sensitivity of their stock prices may be due to the fact that most of these Indonesian firms are net importers. Interestingly, the agricultural sector comes out as the most stable sector, having the least exposure and exhibiting stable performance during the Asian financial crisis of 1997/1998. For overall exchange rate exposure across all firms, we run a pooled generalized least squares model. We find that the exchange rate exposure of the Indonesian sample firms is time-variant, or in other words, very much dependent on the subperiods (before crisis, during crisis and after crisis) under study.

Reexamining the Exchange Rate Exposure Puzzle by Classifying Exchange Rate Risks into Two Types

The “exchange rate exposure puzzle” refers to the phenomenon in which the proportion of firms with significant exchange rate exposure tends to be lower than expected figures. Some studies use changes in exchange rate to indicate exchange rate risks relevant to firm value. However, a different measure of exchange rate risks, which is the volatility in exchange rate changes, can also affect the value of firms because exchange rate uncertainty can affect international trade and investments of firms. This study classifies exchange rate risks into two types, namely, changes in exchange rate and the standard deviation of exchange rate changes, and empirically examines exchange rate exposure of firms in 12 countries. The results suggest that the proportion of firms with significant exchange rate exposure increases substantially, and thus, weakens the exchange rate exposure puzzle when we also count the cases in which the standard deviation of exchange rate changes affects stock return significantly.

Foreign exchange exposure and impact of policy switch – the case of Malaysian listed firms

This article undertakes an in-depth study of the foreign exchange exposure of Malaysian listed firms. We examine several issues related to firm-specific and overall exposure, including an evaluation of the efficacy of adopting a hard-peg on such exposure. Our sample consists of 158 listed firms and spans the 16 year period, 1990–2005. A multivariate model using four bilateral exchange rates is used to determine firm level exposure while panel data analysis using a random-effects Generalized Least Squares (GLS) model is used to determine system-wide or aggregate sample exposure. We find a total 71% of our sample firms to have significant exchange rate exposure, a rate substantially higher than that reported for most countries, especially developed ones. The US$ is by far the single most important source of exposure with 63% of sample firms exposed to it. The sign of the beta coefficient for three of the four currencies are negative, implying that our sample firms are largely net importers in these currencies. We find exposure to be time variant and dependent on the sector within which a firm operates. Interestingly, the panel data analysis which measures aggregate exposure, shows the US$ to be a significant source of exposure even with the adoption of the hard peg. The change in policy regime to a fixed peg following the crisis appears to have had no impact at either firm-level exposure or overall system-wide exposure.

Exchange Rate Shocks and Firm Competitiveness in a Small, Export-Oriented Economy: The Case of Finland

This study empirically examines how exchange rate shocks affect firms’ competitiveness in the small, export-oriented country of Finland. Specifically, using Sweden as a benchmark and controlling for cross-country sector and industry effects, the forex competition hypothesis is tested using the impact of exchange rate shocks on Finnish stock returns. The empirical tests reveal statistically significant exchange rate exposure of Finnish stock returns. Comparing pre- versus post-euro periods, equities’ exchange rate exposure is much stronger after the introduction of the euro. Further results indicate that Finnish and Swedish sector and industry stock returns positively co-move. This implies market integration in contradiction to the forex competition hypothesis. However, for some sectors and industries interaction variables reveal that the co-movement is conditional on exchange rate movements, especially in the post-euro period.

The use of foreign currency derivatives, corporate governance, and firm value around the world

This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers' self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm's internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm's motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers' self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.

Estimating Korea's Exchange Rate Exposure

This paper conducts an empirical analysis of the exchange rate exposure of 392 Korean firms by employing not only changes in the exchange rate but also the standard deviation of exchange rates as foreign exchange risk. A logit model is also used to identify the major factors in exchange rate exposure. The empirical results in the case of using the standard deviation of exchange rates suggest that: the number of firms showing significant exchange rate exposure has been relatively increasing; exchange rate exposure is more likely for export-oriented manufacturing industries than for nonmanufacturing industries; and large firms using hedging methods are likely to show a low degree of exchange rate exposure.

The Exchange Rate Exposure of Thai Banks: Evidence from 2004-2008

In this study, I estimate the exchange rate exposure of Thai banks to four major currencies consisting of the Japanese yen, the euro, the British pound and the US dollar using a sample of banks listed on the Stock Exchange of Thailand over a period from January 2004 through December 2008. The results show that there are a number of banks in Thailand with significant exchange rate exposure. For the whole sample period, about half of the banks in the sample are exposed to the Japanese yen. The number of banks with significant exposure to the Japanese yen increases to 75% of the sample when the asymmetric effects of exchange rate movements are taken into account. The results also indicate that a few banks are exposed to the US dollar in recent years, which are in line with Chue and Cook (2008) who find that the number of Thai firms with significant currency exposure has decreased to about 27% over the 2002-2006 period. The fact that a number of firms with significant exposure vary from year to year provides some preliminary evidence in support of time variation in exchange rate exposure. Notably, a large number of banks (91.67% of the sample) appear to have significant exposure to the US dollar in 2006 but the exposure to the US dollar becomes less evident in 2007 and 2008. Likewise, while there is no bank in the sample with significant exposure to the Japanese yen in 2006, almost all banks (91.67% of the sample) have significant exposure to the Japanese yen in 2007.

Exchange Rate Shocks and Firm Competitiveness in Small, Export-Oriented Economies

This study empirically examines how exchange rates affect firms’ stock returns in small, export-oriented countries that compete closely with one another. Specifically, controlling for cross-country sector and industry effects between Finland and Sweden, we test the impact of exchange rate shocks on Finnish stock returns. In general, empirical tests reveal statistically significant exchange rate exposure of Finnish stock prices. Comparing pre- versus post-euro periods, equities’ exchange rate exposure is much stronger after the introduction of the euro. Further results show that Finnish and Swedish sector and industry stock values positively co-move with another, which implies market integration as opposed to competitiveness. However, interaction variables reveal that their co-movement is conditional on exchange rate movements for some sectors and industries, especially in the post-euro period. We conclude that countries with small, open economies can be prone to exchange rate movements that (dis)advantage some firms relative to competing firms in other countries.

Corporate Governance and the Hedging Premium around the World

This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers’ self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm’s internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm’s motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers’ self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.

The exchange rate exposure of UK non‐financial companies

PurposeThe purpose of this paper is to investigate the exchange rate exposure of UK non‐financial companies from January 1981 to December 2001.Design/methodology/approachThe study employs different exchange rate measures and adopts an equally weighted exchange rate. The analyses are conducted at the firm level. All analyses are conducted by regressing the firm's exchange rate exposure coefficients on its size, foreign activity variables and financial hedging proxies over the whole sample period.FindingsThe findings show that a higher percentage of UK non‐financial companies are exposed to exchange rate changes than those reported in previous studies. Generally, the results provide a stronger support for the suggested equally weighted rate as an economic variable, which affects firms’ stock returns. The results also show a high proportion of positive exposure coefficients among firms with significant exchange rate exposure, indicating a higher proportion of firms benefiting from an appreciation of the pound. Finally, the results also indicate evidence that firms’ foreign operations and hedging variables affect their sensitivity to exchange rate exposure.Practical implicationsThis study provides important implications for public policymakers who wish to understand links between policies that affect exchange rates and relative wealth effects.Originality/valueThe empirical results of this study should help investors to examine how common stock returns react to exchange rate fluctuations when making financial decisions, and prove useful for financial managers when measuring exposure to foreign exchange rate changes.

Exchange rate exposure, foreign currency derivatives and the introduction of the euro: French evidence

We investigate the impact of the introduction of the Euro on exchange rate exposures for French corporations and examine the corporate use of foreign currency derivatives to hedge exchange rate exposure post-Euro. Our findings indicate that the introduction of the Euro is associated with both a reduction in the number of firms that have significant exchange rate exposure and the absolute size of exposure. Consistent with these reduced exposures, French firms use foreign currency derivatives less intensively. Furthermore, the use of foreign currency derivatives is found to be associated with lower exchange rate exposure but there is insufficient evidence that these instruments are more effective in the post-Euro environment.

Firm-specific Exchange Rate Exposure of Japanese Multinational Corporations

This paper empirically examines the firm-specific exchange rate exposure of Japanese multinational corporations (MNC). Although financial theory strongly supports that exchange rate movement should affect the value of a multinational corporation, most previous studies failed to document significant exchange rate exposure. One major reason for the failure is the incorrectly selection of the exchange rate index. In this paper, using detailed exchange rate data, we propose a method to construct a firm-specific exchange rate index for each Japanese MNC. Our results show that with a more appropriate firm-specific exchange rate index, we can better capture the exchange rate exposure of MNCs. Moreover, when incorporating a crisis indicator in the standard model to capture the impact of crisis on exchange rate exposure, we get more firms with significant exposure. This result indicates that crises may have a different impact on MNC's exchange rate exposure than periods of normal exchange rate fluctuation.

Exchange Rate Exposure, Foreign Currency Derivatives and the Introduction of the Euro: French Evidence

In this paper, we investigative the impact of the introduction of the Euro on exchange rate exposures and the subsequent hedging practices of a sample of French corporations. Our findings indicate that the introduction of the Euro led to both a reduction in the number of firms that have significant exchange rate exposure and the absolute size of exposure. In response to these reduced exposures, French firms tend to use foreign currency derivatives less intensively although there has been no change in the number of firms that make use of the instruments. Furthermore, the use of foreign currency derivatives is found to be effective in managing exchange rate exposure but there is insufficient evidence that these instruments are more effective in post Euro periods.

The Exchange Rate Exposure of UK Nonfinancial Companies: Industry-Level Analysis

In line with the financial theory, any change in an exchange rate should affect the value of a firm or an industry. However, earlier research did not fully support this theory, which is surprising in view of the considerable exchange rate fluctuations over the last three decades. This study extends previous research on the foreign exchange rate exposure by investigating contemporaneous and lagged exchange rate exposure of UK nonfinancial companies at the industry level. The analyses are conducted over the total period from 1981 to 2001 and over three subperiods. Since the UK joined the ERM on October 8, 1990 and remained a member until September 16, 1992, the sample period is split into three subperiods: Pre-ERM, In-ERM and Post-ERM subperiods. Therefore, the study also aims to identify the sensitivity of industries' stock returns to exchange rate movements over these three subperiods. The current study is different from previous studies as it considers the impact of the actual and unexpected changes in exchange rates on industries' stock returns. The findings show that a higher percentage of UK industries are exposed to contemporaneous exchange rate changes than those reported in previous studies. There is also evidence of significant lagged exchange rate exposure. This lagged exchange rate exposure goes in line with the findings of previous studies, in that it shows some market inefficiencies in incorporating exchange rate changes into the returns of firms and industries. Generally, the sensitivities of UK industries' stock returns to exchange rate fluctuations are most evident in the period before joining the ERM and after departure from the ERM (post-ERM). The proportion of industries with a significant exchange rate exposure declined when the pound was in the ERM and increased again after the UK left it. The findings of the study have significant implications for public policy makers, investors and managers. However, there is a need for research that considers the factors or determinants that might affect a firm's or an industry's exposure to changes in exchange rates.

Multinational corporations and hedging exchange rate exposure

Empirical research measuring multinational corporations' exchange rate exposure is inconclusive. Findings of no significant exposure in some samples and significant exposure in others may be due to offsetting effects for multinational corporations, financial hedging strategies, or simply noisy data. Significant exposure has been found in certain industries and for some smaller firms. This study measures the net exposure to exchange rate changes for a broad cross section of large, US multinational corporations. Using data on financial hedging activity for 276 US multinational corporations, this paper provides evidence that previous findings of no significant exchange rate exposure for this cross section of the economy are likely due in part to the financial hedging activities of these firms.

Exchange-Rate Exposure of Multinationals: Focusing on Exchange- Rate Issues

This paper examines exchange-rate exposure of multinationals (MNEs) in light of detailed exchange rate data. Specifically, using MNE-specific exchange rates and accounting for the possibility that exchange-rate crises may impact a firm differently than periods of normal fluctuations, estimates suggest 1/4 of all MNEs had significant exchange rate exposure between 1995 and 1999. On average, significant exposure is estimated to be 0.68, indicating that a firm's monthly return falls, on average, by 0.68 percentage points when the dollar appreciates one percent. This encompasses periods where there are normal fluctuations in the exchange rate and the average exposure is estimated to be 0.55, as well as crisis periods where the average exposure is estimated to be 2.8. Finally, results illustrate that MNEs operating in more than 20 countries (having more than 30 subsidiaries) have twice the exposure of MNEs operating in one country (having one subsidiary).

Exchange-Rate Exposure of Multinationals: Focusing on Exchange-Rate Issues

This paper examines exchange-rate exposure of multinationals (MNEs) in light of detailed exchange rate data. Specifically, using MNE-specific exchange rates and accounting for the possibility that exchange-rate crises may impact a firm differently than periods of normal fluctuations, estimates suggest ¼ of all MNEs had significant exchange rate exposure between 1995 and 1999. On average, significant exposure is estimated to be 0.68, indicating that a firm's monthly return falls, on average, by 0.68 percentage points when the dollar appreciates one percent. This encompasses periods where there are normal fluctuations in the exchange rate and the average exposure is estimated to be 0.55, as well as crisis periods where the average exposure is estimated to be 2.8. Finally, results illustrate that MNEs operating in more than 20 countries (having more than 30 subsidiaries) have twice the exposure of MNEs operating in one country (having one subsidiary).