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Resolving the exposure puzzle: The many facets of exchange rate exposure

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Bartram, Söhnke M., Brown, Gregory W. and Minton, Bernadette A. (2010) Resolving the exposure puzzle: The many facets of exchange rate exposure. Journal of Financial Economics, Vol.95 (No.2). pp. 148-173. doi:10.1016/j.jfineco.2009.09.002

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Official URL: http://dx.doi.org/10.1016/j.jfineco.2009.09.002

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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 10–15%. 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.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Journal of Financial Economics
Publisher: Elsevier Science BV
ISSN: 0304-405X
Official Date: 2010
Dates:
DateEvent
2010Published
Volume: Vol.95
Number: No.2
Number of Pages: 26
Page Range: pp. 148-173
DOI: 10.1016/j.jfineco.2009.09.002
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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