The exchange rate exposure of Taiwanese banking institutions
Regulators only require banks to manage their short-term exchange rate risk stringently. A possible reason is that the prevailing capital-market methodology cannot determine the long-term exchange rate risk. Using the real performance of operating incomes, this paper investigates the impact of fluctuating foreign currencies on the values of Taiwanese banking institutions, and decomposes the overall exchange rate risk into short-term and long-term components. We not only overcome the deficiency of prior studies that have limited success in detecting significant currency exposure, but also measure correct economic exposure that firms are confronted with. Comparing with the capital market approach, we find the evidence of the relative strength of cash flows to detect currency exposure. After controlling for the impact of interest rates, we find that, over the time period examined, 61.54% of the sample firms have a significant currency exposure, which is larger than those documented by prior research. Our result also shows that the existence of significant long-term exchange rate risk is prevalent among Taiwanese banking institutions. Furthermore, US dollar (the currency of a nation which is Taiwan¡¦s largest exporting country) has an opposite effect as opposed to Japanese Yen (the currency of a nation which is Taiwan¡¦s largest importing partner). Our results have policy implications that banking institutions should manage long-term currency exposure.
Advisor:Yue-shan Chang; Ming-chi Chen; Y. Chris Liao
School:National Sun Yat-Sen University
School Location:China - Taiwan
Source Type:Master's Thesis
Keywords:cash flows multinational corporations exchange rate risk
Date of Publication:04/20/2006