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

Söhnke Bartram, Gregory W. Brown and Bernadette Minton

MPRA Paper from University Library of Munich, Germany

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 (search for similar items in EconPapers)
JEL-codes: F3 F4 G3 (search for similar items in EconPapers)
Date: 2009-01-01
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Resolving the exposure puzzle: The many facets of exchange rate exposure (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:14041

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