Foreign Exchange Exposure on the Spanish Stock Market: Sources of Risk and Hedging

Abstract:     
This paper examines the foreign exchange exposure of a sample of 71 non financial companies quoted on the Spanish Stock Exchange Market between January 1992 and December 1997. The level of exposure was obtained from time-series regressions between monthly returns of firms or portfolios, as a dependent variable and the monthly market return and the nominal effective exchange-rate change of the Spanish currency as independent variables.

The second part of our study was dedicated to the analysis of levels of exports, imports and foreign debt as possible explanatory factors of exchange rate risk exposure, as well as a study of effects of foreign currency hedging, measured through proxies, on the levels of economic exposure. Then, a cross-sectional regression between the exposure coefficients, as a dependent variable, and the previous factors as independent variables was carried out.

The results indicate the existence of economic exposure in about twenty percent of companies and that exports and imports are decisive factors in the level of economic exposure to exchange rate risk. Exports have a positive effect on returns as a result of the exchange rate changes, whereas imports have a negative effect. Furthermore, the results suggest that economic exposure is inversely related to the size of firms and directly with Forex adjustment, which have been used as foreign currency hedging proxy; these results would seem to confirm that foreign currency hedging reduces exchange- rate exposure.

Number of Pages in PDF File: 26

Keywords: Foreign Exchange Rate Risk; Economic Exposure; Hedging; Stock Prices

JEL Classification: F31, G1, F23

working papers series