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http://hdl.handle.net/11375/27833
Title: | Firm foreign activity and exchange rate risk |
Authors: | Akbari, Amir Carrieri, Francesca Michael Lee-Chin & Family Institute for Strategic Business Studies |
Keywords: | International finance;Foreign exchange rate risk;Currency exposure;Multinationals;Corporate foreign sales |
Publication Date: | Feb-2022 |
Series/Report no.: | Michael Lee-Chin & Family Institute for Strategic Business Studies Working Paper;2022-02 |
Abstract: | Globally focused firms are the drivers of foreign exchange rate (FX) risk. Among the risk of the G10 currencies, the comovements with the largest currencies are the most important of the postulated risk factors. Firms’ exposure to FX risk is time-varying, is larger with respect to the home currency, and responds to fluctuations in the home FX. Firms are more sensitive to the currency risk of their geographical region, in line with a gravity effect, are more exposed in countries with a large export sector and when located in the peripheries of the global trade network. The extent of firms’ foreign activity most strongly matters in explaining their FX risk exposure, controlling for other firm-level characteristics such as size, leverage, and liquidity. Overall, our results point to the importance of the trade channel over the investment channel for FX risk pricing. Valuation Insight: Valuation of firms with substantial foreign trade depends importantly on exchange rate movements and exchange risk. This paper finds that such firms are more exposed to exchange risk when they are in countries with a large export sector and in countries on the periphery of the global trade network. Typically, such firms would have higher cost of equity capital which would affect value negatively. However, the paper finds that the exchange risk premia may be negative so that higher exchange risk exposure in fact lowers the cost of equity capital and enhances value. |
Description: | 59 p. ; Includes bibliographical references (pp. 35-40) ; Acknowledgements: The authors thank George Allayannis, Joon Woo Bae, Ron Balvers, Lilian Ng, Takeshi Yamada, Le Zhang, and seminar participants at the College of Business and Economics at Australian National University for their helpful comments. Amir Akbari is an Assistant Professor of Finance at the DeGroote School of Business, McMaster University. Francesca Carrieri is an Associate Professor of Finance at the Desautels Faculty of Management, McGill University. |
URI: | http://hdl.handle.net/11375/27833 |
Appears in Collections: | Michael Lee-Chin & Family Institute for Strategic Business Studies Working Paper Series |
Files in This Item:
File | Description | Size | Format | |
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sbv_wp_2022-02.pdf | 2.03 MB | Adobe PDF | View/Open |
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