Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure
63 Pages Posted: 6 Jul 2009 Last revised: 23 Dec 2019
Date Written: July 3, 2009
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.
Keywords: Competition, hedging, FX exposure, derivatives, international finance
JEL Classification: G3, F4, F3
Suggested Citation: Suggested Citation