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

EFA 2007 Ljubljana Meetings Paper

FDIC Center For Financial Research Working Paper Number 2007-07

63 Pages Posted: 16 Mar 2006 Last revised: 11 Mar 2014

See all articles by Söhnke M. Bartram

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: January 2009

Abstract

Theoretical research predicts many firms should have sizeable exchange rate exposure. However, empirical research has not documented consistently strong relations between exchange rates and stock prices. To examine this discrepancy, we extend prior theoretical results to model a global firm's exchange rate exposure. Using this model and a global sample manufacturing firms from 16 countries, we show empirically that firms pass part of currency changes through to customers, utilize operational hedges (e.g., matching foreign sales with foreign production), and employ financial risk management strategies. We estimate that for a typical firm in our sample, pass-through and operational hedging each reduce exposure by 10% to 15%. Financial hedging with foreign currency debt, and to a lesser extent FX derivatives, appears to reduce exposure by about 40%. The combination of these factors reduces exchange rate exposures to observed levels.

Keywords: Competition, hedging, exposure, derivatives, corporate finance, 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 (January 2009). EFA 2007 Ljubljana Meetings Paper; FDIC Center For Financial Research Working Paper Number 2007-07. Available at SSRN: https://ssrn.com/abstract=891177 or http://dx.doi.org/10.2139/ssrn.891177

Söhnke M. Bartram

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 (Contact Author)

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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