Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2007-07
Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure
May 2007
Empirical Comparisons and Implied Recovery Rates
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An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2007-07
Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure
May 2007
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
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Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure
Söhnke M. Bartram*, Gregory W. Brown+, and Bernadette A. Minton#
Abstract
Theoretical research suggests firms should ha ve significant excha nge rate exposure.
However, empirical research has not documented such a relation. We extend prior theo-
retical results to model a global firm’s exchange rate exposure. Using this model and a
global sample of 1,161 manufacturing firms from 16 countries, we show empirically that
firms pass part of currency changes through to customers, utilize operational hedges (e.g.,
matching foreign sales with foreign productio n), and employ financial risk management
strategies. For a typical firm pass-through and operational hedging each reduce exposure
by 10% to 15% and financial hedging reduces exposure by 45% to 50%. The combina-
tion of these factors explains the low observed levels of exchange rate exposure.
Keywords: Competition, hedging, exposure, derivatives, corporate finance, international finance
JEL Classification: G3, F4, F3
First version: October 1, 2005
This version: May 29, 2007
* Lancaster University, Management School, Department of Accounting and Finance, Lancaster LA1 4YX, United
Kingdom, phone: +44 (15 24) 592 083, fax: +1 (425) 952 10 70, Email: <s.m.bartram@lancaster.ac.uk>, Internet:
<http://www.lancs.ac.uk/staff/bartras1/>.
+ Corresponding Author, Associate Professor of Finance, Kenan-Flagler Business School, The University of North
Carolina at Chapel Hill, CB 3490, McColl Building, Chapel Hill, NC 27599-3490 USA, phone: (919) 962-9250,
Email: gregwbrown@unc.edu.
# Associate Professor of Finance, Fisher College of Business, The Ohio State University, 834 Fisher Hall, 2100 Neil
Avenue, Columbus, OH 43210-1144 USA, phone: (614) 688-3125, Email: minton_15@cob.osu.edu.
The authors wish to thank Eitan Goldman and Merih Sevilir for their assistance with the enhanced BDM model as
well as Keith Brown, Kalok Chan, Joshua Coval, John Griffin, Yrjö Koskinen, Stephen Magee, John Hund, James
Ohlson, Mitchell Petersen, DoAnne Sanchez, Matt Spiegel, Roberto Wessels and seminar participants at the 2006
Financial Intermediation Research Society Conference, 2006 FDIC Summer Research Workshop, Bank of Canada,
Forum on Corporate Finance, Hong Kong University of Science and Technology, Humboldt University Berlin, Pe-
king University, University of North Carolina, University of Texas at Austin, University of Toronto and York Uni-
versity for helpful comments and suggestions. They gratefully acknowledge research funding by the Center for Fi-
nancial Research of the FDIC and the International Centre for Research in Accounting as well as support by Mike
Pacey, Global Reports, and T homson Financial in establishing the dataset. Florian Bardong pr ovided excellent re-
search assistance.
Söhnke M. Bartram*, Gregory W. Brown+, and Bernadette A. Minton#
Abstract
Theoretical research suggests firms should ha ve significant excha nge rate exposure.
However, empirical research has not documented such a relation. We extend prior theo-
retical results to model a global firm’s exchange rate exposure. Using this model and a
global sample of 1,161 manufacturing firms from 16 countries, we show empirically that
firms pass part of currency changes through to customers, utilize operational hedges (e.g.,
matching foreign sales with foreign productio n), and employ financial risk management
strategies. For a typical firm pass-through and operational hedging each reduce exposure
by 10% to 15% and financial hedging reduces exposure by 45% to 50%. The combina-
tion of these factors explains the low observed levels of exchange rate exposure.
Keywords: Competition, hedging, exposure, derivatives, corporate finance, international finance
JEL Classification: G3, F4, F3
First version: October 1, 2005
This version: May 29, 2007
* Lancaster University, Management School, Department of Accounting and Finance, Lancaster LA1 4YX, United
Kingdom, phone: +44 (15 24) 592 083, fax: +1 (425) 952 10 70, Email: <s.m.bartram@lancaster.ac.uk>, Internet:
<http://www.lancs.ac.uk/staff/bartras1/>.
+ Corresponding Author, Associate Professor of Finance, Kenan-Flagler Business School, The University of North
Carolina at Chapel Hill, CB 3490, McColl Building, Chapel Hill, NC 27599-3490 USA, phone: (919) 962-9250,
Email: gregwbrown@unc.edu.
# Associate Professor of Finance, Fisher College of Business, The Ohio State University, 834 Fisher Hall, 2100 Neil
Avenue, Columbus, OH 43210-1144 USA, phone: (614) 688-3125, Email: minton_15@cob.osu.edu.
The authors wish to thank Eitan Goldman and Merih Sevilir for their assistance with the enhanced BDM model as
well as Keith Brown, Kalok Chan, Joshua Coval, John Griffin, Yrjö Koskinen, Stephen Magee, John Hund, James
Ohlson, Mitchell Petersen, DoAnne Sanchez, Matt Spiegel, Roberto Wessels and seminar participants at the 2006
Financial Intermediation Research Society Conference, 2006 FDIC Summer Research Workshop, Bank of Canada,
Forum on Corporate Finance, Hong Kong University of Science and Technology, Humboldt University Berlin, Pe-
king University, University of North Carolina, University of Texas at Austin, University of Toronto and York Uni-
versity for helpful comments and suggestions. They gratefully acknowledge research funding by the Center for Fi-
nancial Research of the FDIC and the International Centre for Research in Accounting as well as support by Mike
Pacey, Global Reports, and T homson Financial in establishing the dataset. Florian Bardong pr ovided excellent re-
search assistance.