Firm Foreign Activity and the Geography of Exchange Rate Risk

Abstract

Globally-focused firms, more than domestic ones, are the key drivers of foreign exchange rate (FX) risk. They explain a larger fraction of the factors’ variation and have higher FX exposure, specifically during the home currency depreciation. Their exposure is higher in countries more dependent on the export sector and to neighbors’ currencies, in line with gravity effects. Consistent with the geography of FX risk, those in the core of the global trade network are less exposed, especially to relatively close currencies, reflecting diversification benefits. Overall, we find the economic origins of FX risk pricing in the trade channel over investment.

Keywords: International Finance, Foreign Exchange Rate Risk, Currency Exposure, Multinationals, Corporate Foreign Sales

JEL Classification: F31, F23, G12, G15