Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure
Söhnke M. Bartram
Warwick Business School - Department of Finance
Gregory W. Brown
University of North Carolina (UNC) at Chapel Hill - Finance Area
Bernadette A. Minton
Ohio State University (OSU) - Department of Finance
July 3, 2009
Journal of Financial Economics (JFE), Vol. 95, No. 2, February 2010, pp. 148-173.
Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research has not documented such exposures. To examine this discrepancy, we extend prior theoretical results to model a global firm’s FX exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges. For a typical sample firm, pass-through and operational hedging each reduce exposure by 10% to 15%. Financial hedging with foreign debt, and to a lesser extent FX derivatives, decreases exposure by about 40%. The combination of these factors reduces FX exposures to observed levels.
Number of Pages in PDF File: 63
Keywords: Competition, hedging, FX exposure, derivatives, international finance
JEL Classification: G3, F4, F3Accepted Paper Series
Date posted: July 6, 2009 ; Last revised: March 10, 2014
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