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

63 Pages Posted: 6 Jul 2009 Last revised: 23 Dec 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

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., WBS Finance Group Research Paper No. 127, Available at SSRN: https://ssrn.com/abstract=1429286

Söhnke M. Bartram (Contact Author)

University of Warwick ( email )

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

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
517
Abstract Views
3,848
Rank
14,775
PlumX Metrics