This website uses cookies to ensure you have the best experience. Learn more

Exchange Rate Exposure Essay

1469 words - 6 pages

Exchange Rate Exposure

Dominique and Tesar 2006 – Journal of International Economics 68

Summary by Paolo De Angelis

As any introduction, the first part of the article describes and conjects about the main thesis: a possible relationship within exchange rate exposure and firm value.
The Authors talk about their work and how they builded such strong hypothesis to demonstrate which is the connection and doing that they explain two objectives: understand how much these firms are exposed to exchange rate fluctuation and investigate why some firms are exposed and some not.
Then there is an explanation about tools used to do the research and statistic technique used to test different ...view middle of the document...

Considering that, big firms have well-managed hedging systems so we can deduct that every firm is continously exposed but according to D. and T. their adaptive strategies permit to observe an ongoing phenomenon of exposition.
Afterthat there is a very short but important analitical explanation about the exchange rate exposure existence and influence. Using CAPM and its hypothesis Domnique and Tesar demonstrate why the B2, i (delta)St is different from zero and this is a part of a even more bunch of ideas that in the last 20 years are discouraging the Capital Asset Pricing Model.
Doing that they find a good reason, same as the real world, that there is a truly relation, between excess returns and exchange rates,analytical speaking. Even do this Beta will be linked with: “… a set of factors that could proxy for plausible channels for exposure.”
The importance of the third part of the paper is based on a wide description about how datas had been gathered. There are not a lot of words to spend on it but is important to understand how the two Economists constructed their theory. Personally this short part of the paper is the key to realize the same results, specially about different source and methods they used to organize the researches.

The core of the article is well designed to compare datas and assumption like a swinging path throrough the essay. The first question is about finding the relevant exchange rate to compare the results. The most diffused is the trade weighted exchange rate which is unlikely to be affect by possible mistakes about semi-exposure of some firms to the currency, but as suggested by Williamson it could be solved creating specifing exchange rates.
The Authors analyze two graph showing the relations among country’s firm or industry and different exchange rate; thus making a comparison about different exposure related on different country and indicating with “any exch rate” a sort of correlation among dual exchange rates.
It is easy to observe how many difficulties are in this comparison because of two reason: the time exposure to exchange rate and the hedging process done by international firms. Infact in a third graph using an industry specific trade based exchange rate the Authors improved the low possibility to find a relation in the sequent analysis because of using both import\export rates there are not relevant results (as shown in Fig. 2 on page 11).
The definition of market index to use to compare results takes a relevant discussion. The first is about value weight index that eliminate macroeconomics and negative exchange rate’s effect on cash flows.
But there is another best index called “equally weight index” that is like to compare different sized firms because of weighted evaluation of their portfolio or fund composition (example found on Investopedia: Rydex S&P Equal Weight ETF).
Then the Authors talk abuout World Index of Datastream which unfortunately reveals poor in explenating return effect.

Other Papers Like Exchange Rate Exposure

Mitigating Exchange Risk Essay

252 words - 2 pages Mitigating Exchange Rate Risk FIN /370 Aug 12,2013 Mitigating Exchange Risk MSMEs are exposed to many forms of risk in their course of business, such as interest rate risk, foreign exchange risk, and natural disasters. These could result in financial loss and minimize their profit. Since MSMEs work on tighter budgets than larger firms, and have weaker capital base, losses through exposure to various risks can

Foreign Exchange Market Essay

741 words - 3 pages Tutorial 9 Presentation Questions (Foreign Exchange Markets) 1. Describe the main types of risk facing an organization which has dealings in a foreign currency. Can all these risks be hedged, and should all these risks be hedged at all times ? The main foreign exchange risks faced by the organization include : * Short-Term Exposure * The day-to-day fluctuations in exchange rates. * Can be reduced or eliminated

International Business Case 10

530 words - 3 pages Francisco Huber BS 455 Case 10 1) Blades is subject to transaction and economic exposure. This is because transaction exposure is the degrees to which the value of future cash flows can be affected due to exchange rate fluctuations. On the other hand, economic exposure is the degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations. 2) Currency | Total Inflow | Total outflow

An Analysis of International Finance Issues & Vodafone

4021 words - 17 pages Title: Vodafone Exchange Rate Report 2011 Contents 1.0 Introduction 2 2.0 Aims and Objectives 2 3.0 Company Profile 3 4.0 Euro Exchange Rate Forecast 4 4.1 Purchasing Power Parity 4 4.2 Interest Rate Parity 6 4.3 International Fisher Effect 7 4.4 Forward Rate Forecasting 8 4.5 Summary Forecast 9 5.0 Yield Curve Analysis 9 6.0 Nature of exposures 12 6.1 Pre-Transaction Exposure 12 6.2 Transaction

Foreign Exchange

2018 words - 9 pages : arises because exchange rate changes alter the value of future revenues and costs. Accounting Exposure B. Accounting Exposure = Transaction risk + Translation risk [pic] ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE C. Economic Exposure = Transaction Exposure +Operating Exposure Operating Exposure arises because exchange rate changes alter the value of future revenues and costs. PART II. ALTERNATIVE


5097 words - 21 pages different approaches towards exchange rate forecasting. • Understand the differences between transaction, translation, and economic exposure, and what managers do to manage each type of exposure. The foreign exchange market is the market where currencies are bought and sold and currency prices are determined. It is a network of banks, brokers and dealers that exchange currencies 24 hours a day. Exchange rates determine

Carrefour Case

1697 words - 7 pages will be affected by changes in exchange rates. Carrefour is exposed to exchange rate risk because of foreign-currency exposure from imported goods. This risk was being hedged through forward contracts. The €13.5 billion of debt on the Carrefour books is 97% hedged in Euro currency. Carrefour has a large exposure risk to the Euro because of their hedging policy. Questions from the Book 1. What is going on at carrefour? • Carrefour

What Do You Have Learnt from This Fin-645 Course?

1027 words - 5 pages from this course has been the relevance of the exchange rate risk. Different sorts of argument have been placed regarding this risk relevance. Three types of exchange rate fluctuations exposure has been discussed here. i.e. translation exposure, economic exposure, transaction exposure. These exposures have been discussed in detail with different examples and views which have enabled me in understanding these issues very clearly. Last but not

Transaction Risk

661 words - 3 pages University of Phoenix Material Week Four Individual Assignment: Financial Transaction Risks Describe the risk exposure(s) in the following financial transactions. Identify which transactions are influenced by interest rates or interest income. (CAUTION: Some can be influenced by both!) Risk Types: Interest rate risk, Credit risk, Technology risk, Foreign exchange rate risk, Country or sovereign risk |Financial Transactions

Tiffany Case Study

1835 words - 8 pages $73,000,000. Foreign Exchange Exposures of Tiffany There are three main types of foreign exchange exposures for Tiffany – 1) Economic exposure 2) Translation Exposure 3) Transaction Exposure Translation Exposure- since Tiffany-Japan is a wholly owned subsidiary of Tiffany, as a public company, Tiffany has to consolidate financial report of its Japanese branch. So, an unanticipated change in yen/dollar exchange rate will affect the company overall

Case Study Analysis: Lufthansa: to Hedge or Not to Hedge…

1691 words - 7 pages determine the appropriate solution. This scenario exposed Lufthansa to significant foreign exchange risk. The biggest factor for Lufthansa to consider is their exposure to exchange rate risk; this is typically very volatile due to both the US dollar and the Deutsche Marks being floated on the market. Therefore, instead of having a stable dollar these countries chose to keep inflation steady. However, this is not the only factor of uncertainty that

Related Essays

Translation Exposure Essay

1355 words - 6 pages 1. Current Method: All current assets and Current liabilities are translated at the current exchange rate. 2. Monetary/ Non-Monetary Method: All monetary assets and current liabilities are translated at the current exchange rate. Example Current Method: Unexposed = Net worth + (long term liabilities – long term assets) ​ = Net working capital. Example Monetary/ Non-Monetary Method: Exposure = Net foreign currency monetary

Risk Of Doing Business Abroad Essay

620 words - 3 pages The Risk of doing Business Abroad Risk of doing Business Abroad How can a company eliminate the risk of foreign exchange rate while doing business overseas? Simple do not do business overseas. * Economic Exposure: When changes occur in rates, operating costs will make a product uncompetitive in the global market. Profits will be diminished. There is very little that a company can do about economic risk. * Translation Exposure

The Risk Management Essay

978 words - 4 pages ¥10 million into $100000 at the currency exchange rate $1=Â¥100. After one year , the company needs Â¥103 to repay the Yen credit. If the Dollar and Yen exchange rate was $1=Â¥80, then this firm would pay about $802400 to buy Â¥100 million. translation exposure A company’s translation risks is impacted by exchange rate .Translation risk refer to the revaluation account of overseas capital that are held in a foreign currency since foreign

Case Study

1442 words - 6 pages Table of Contents Executive Summary 3 Net Exposure 4 Offsetting Exchange Rate Effects 4 The Canadian Dollar 5 Risk of Hedging Net Inflows 5 A Subsidiary as a Solution? 5 Summary of Recommendations 6 References 7 Appendix 8 Executive Summary The U.S. firm, Vogl Company, has global import and export operations that can significantly impact its financial position. The firm both imports and exports to Canada, New Zealand