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Exchange rate exposure and risk management: The case of Japanese exporting firms

Takatoshi Ito (), Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Journal of the Japanese and International Economies, 2016, vol. 41, issue C, 17-29

Abstract: This paper investigates the relationship between Japanese firms’ exposure to the exchange rate risk and their risk management. Following Dominguez (1998) and others, we first estimate the firms’ exposure to the exchange rate risk by regressing their stock prices on the exchange rate and the market portfolio. We next investigate possible influences of various risk management measures on the firms’ foreign exchange exposure. Risk management variables include financial and operational hedging, the invoice currency choice, and the price revision strategy (pass-through) of 227 listed firms in 2009, which were collected from a questionnaire survey of Japanese firms listed in the Tokyo Stock Exchange. Our main findings are as follows: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure, judged by the market. Second, the higher the US dollar invoicing share, the greater the foreign exchange exposure is, which can be reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use a combination of risk management tools to mitigate the degree of exchange rate risk.

Keywords: Exchange rate risk management; Invoice currency; Operational hedge; Financial hedge; Exchange rate pass-through (search for similar items in EconPapers)
JEL-codes: F31 G15 G32 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Exchange Rate Exposure and Risk Management: The case of Japanese Exporting Firms (2015) Downloads
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DOI: 10.1016/j.jjie.2016.05.001

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