Academic journal article Journal of Financial Management & Analysis

Foreign Exchange Exposures and Asymmetries of Exchange Rate : Korean Economy Is Highly Vulnerable to Exchange Rate Variations

Academic journal article Journal of Financial Management & Analysis

Foreign Exchange Exposures and Asymmetries of Exchange Rate : Korean Economy Is Highly Vulnerable to Exchange Rate Variations

Article excerpt

Introduction

Economic exposure, unlike accounting exposure or transaction exposure which focuses on the firm's financial statements or immediate-term finances, measures the extent to which a firm's cash flow changes with exchange rates. Recently, estimation of exchange rate through the market value approach is generally accepted, as the method based on the cash flow is inefficient and inconvenient to collect data source. A firm's market value is based on the current value of future net cash flow of the firm. Adler and Dumas1 show that the economic exposure for a firm is equal to the coefficients from a regression of the change in the firm's market value as the dependent variable, and changes in exchange rates as the explanatory variables.

Recent works on exposures have been focusing on the individual firms rather than on the industries or on the portfolio. It has advantages of being able to draw the strategic implications for each individual firm, for the exposure coefficients of every firm have different level of significance and degree. As the results of estimating the individual firm's exchange rate exposures through various methods and samples applied, it was hard to find the foreign exchange rate exposures exceeding 25 percent in most of the existing research works. However, the low rate is not a result of the actual low exposures, but of irrelevant samples and estimating methods. Data on exposures of individual firms are usually time series data, with diverse heteroscedascity, serial correlation, and distribution of variables. Thus, it is recommendable to adopt models that incorporate individual firms' data characteristics. Furthermore, Chamberlain, Howe and Popper2 have asserted that daily frequency has more explanatory power than monthly frequency in bank industry of the US and Japan, suggesting the need to analyze daily data. However, the models using daily data have more noises, which require special attention when interpreting the outcome.

In this paper, we are to analyze various foreign exchange exposure models of the individual firm, with daily and monthly frequencies. This is based on a realistic view that the individual firm's exposure model does not have identical standard error distributions. Most of the data used in the estimation of individual's exchange rate exposures are monthly frequencies of returns of individual firms or stock index and foreign exchange rate. Therefore, problems did not occur concerning the standard error distribution. However, in using the daily tlata, these problems need careful consideration, and for this, we need the AR-GARCH models. Recent works on exchange rate exposures have been relaxing the assumption of symmetric movements of exchange rates and expanding it to the asymmetric analysis. Asymmetries are measured by the exposure difference between depreciation and appreciation of home currency. In more recent empirical studies (e.g., Miller and Reuer3, and Irio and Faff4), significant asymmetries have been founded. Asymmetric exchange rate exposures are accounted for by the real option theory and the industry structure. The latter is that the pricing of a firm is influenced by its competitiveness in the domestic industries and international environments, while the former is that the firm has its hedging policy and strategy.

The purpose of this paper is to compare the influences that the daily and monthly exposures have on firm's value based on the facts explained above. Through this, we are to discover significant points in setting the frequency of the research data to catch more exposures. Also, this study compares the economic exchange exposures of the enterprises of Korea before and after the economic crisis in 1997. Korea introduced the Multiple Currency Basket Peg (MCBP) system in Febuary, 1980, then changed to the Market Average Exchange Rate (MAR) system in March, and to the free floating system in December, 1997, which was in the middle of the crisis. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.