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Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure

63 Pages Posted: 6 Jul 2009 Last revised: 10 Mar 2014

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

Multiple version iconThere are 3 versions of this paper

Date Written: July 3, 2009

Abstract

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

Bartram, Söhnke M. and Brown, Gregory W. and Minton, Bernadette A., Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure (July 3, 2009). Journal of Financial Economics (JFE), Vol. 95, No. 2, February 2010, pp. 148-173.. Available at SSRN: https://ssrn.com/abstract=1429286

Söhnke M. Bartram (Contact Author)

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

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