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

Söhnke M. 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: F4 F3 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written
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