Theoretical and Empirical Analysis of the Exchange Rate Exposure
This dissertation includes three issues, however, they are all adopted the view of firm¡¦s foreign exchange rate exposure to do the research. The main results of three topics as follows:
In the first topic, this study uses the example of a Taiwanese firm investing in China and develops an exchange rate exposure model which depends on only four endogenous variables: the percentage of the firm¡¦s revenues denoted in the currency of trade country, the percentage of the firm¡¦s expenses denoted in the currency of trade country and third country, and its profit rate. The main issue in this research attempts to detect whether producing goods in the third country will affect a multinational firm on the exchange rate exposure and whether the currency manipulation will affect the decision of producing goods in the third country. This study finds that if a multinational firm can effectively adjust operational strategy and match foreign currency income with its cost, most of the exposure can be reduced. Besides this reducible effect of operational strategy, it is worth to note that diversified strategy just works under some conditions. For example, whether producing goods in the third country or not, the firm¡¦s exposure will not make changes as long as the currency is equal to its true value. However, under the case of currency manipulation, the firm producing goods in the third country can reduce exchange rate risk further.
In the second topic, this paper studies the sensitivity of the cash flows generated by Chinese and Taiwanese firms to the movements in a trade-weighted exchange rate index, as well as to the currencies of their major trading partners. To overcome the deficiencies in previous researches using variations of the market-based model, this paper adopts the polynomial distributed lag (PDL) model to investigate the relative importance of transaction exposure versus economic exposure by decomposing exchange risk into short-term and long-term components. In contrast to the market-based model, we find that PDL model is better in detecting exposures with evidence confirmed both in China and Taiwan markets. Furthermore, our empirical results also verify past findings in Taiwan market that firms with higher foreign involvement have larger exchange rate exposure, firms with larger size have less exchange rate exposure, firms with larger exporting business are less exposed to the currency of primary exporting country, and firms with larger importing business are less exposed to the currency of primary importing country. However, these results are seldom agreed in China market. These findings imply that the exchange rate under the pegging regime and the floating system significantly affects firms in managing their exchange risk.
In the third topic, it is generally argued that the choice of an appropriate exchange rate regime depends on which regime minimizes fluctuations in output, consumption, domestic price level, or some other macroeconomic variables. However, our study provides alternative analytic evidences on the firm-specific behavior. Using the real performance of operating income, this paper attempts to investigate the impact of fluctuating currencies on the values of U.S., Chinese, and Taiwanese companies. We find that the Chinese companies have more short-term exposures under the pegged regime, and the U.S. companies have more long-term exposures under the floating regime. Under the managed floating system, optimal lag length for Taiwanese companies is close to that of U.S. companies. However, the magnitude of exposure for Taiwanese companies is close to that of Chinese companies. These findings imply that the exchange rate under different exchange rate regimes significantly affects firms in managing their exchange risk.
Advisor:Lo, Henry Y; Wu, Wei-Ming; Yang, Ju-Ann; Kuo, Chau-Jung; Shyu, David So-De
School:National Sun Yat-Sen University
School Location:China - Taiwan
Source Type:Master's Thesis
Keywords:exchange rate regimes pdl model foreign exposure
Date of Publication:06/21/2007