Foreign Exchange-Rate Exposure of Swedish Firms

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JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
J ÖNKÖPING UNIVERSITY

Foreign Exchange-Rate Exposure of
Swedish Firms

BACHELOR THESIS in ECONOMICS
Authors:

ZAHARI STOYANOV
SALEEM AHMAD

Head Supervisor

PROFESSOR ÅKE ANDERSSON

Deputy Supervisor

PH.D. CANDIDATE SARA JOHANSSON

Jönköping

AUTUMN 2006

Bachelor Thesis in Economics
Title:

Foreign Exchange-Rate Exposure of Swedish Firms

Authors:

Zahari Stoyanov and Saleem Ahmad

Tutors:

Professor Åke Andersson
Ph.D Candidate Sara Johansson

Date:

Autumn 2006

Key words:

foreign exchange, exchange rate risk, exchange rate exposure

Abstract
The main focus of the paper is the problem of exchange-rate exposure of Swedish firms between Jan, 1st 2002 and Sep, 27th 2006. Defined as “a measure of the potential for a firm’s profitability, net cash flow, market value to change because of a change in exchange rates”, the problem of exchange rate exposure is investigated, making use of the “Market Value Approach” (also known as “Stock Market Approach”), with certain additional extensions. With Sweden being a very open economy with strong export orientation, we expected to find a greater number of firms showing significant exchange rate exposure to one or more of the chosen 6 bilateral exchange rates (SEK/EUR, SEK/USD, SEK/DKK, SEK/NOK, SEK/GBP and SEK/JPY). Also, companies are divided into categories with respect to their main operating activity. The empirical study finds 78% of all companies in the sample with significant exposure, with dominance of lagged effect over contemporaneous. This percentage is higher than found in previous empirical studies, being in support of the suggestion that relation exists between economy openness and exchange rate exposure of firms. However, the significant cross-section differences across categories and the high level of heterogeneity within categories deter us from determining the sign, direction and magnitude of the exchange rate exposure. Suggestions are made for further studies and possible extensions of the topic of the present paper.

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Table of Contents
Chapter 1. Introduction..................................................................1 1.1
1.2
1.3
1.4

Background............................................................................................ 1 Literature Review ................................................................................... 2 Purpose of the Thesis ............................................................................ 3 Outline of the Thesis.............................................................................. 3

Chapter 2. Theoretical Background..............................................4 2.1
2.1.1
2.1.2
2.1.3
2.1.4
2.2
2.3
2.3.1
2.3.2
2.3.3
2.3.4
2.3.5
2.3.6

Foreign Exchange-Rate Exposure ......................................................... 4 Translation Exposure ............................................................................ 4 Transaction Exposure ........................................................................... 4 Economic (Operating) Exposure … ....................................................... 4 Tax Exposure ...................................................................................... 5 Exchange-Rate Risk .............................................................................. 6 Macroeconomic Uncertainty .................................................................. 8 Interest Rate Differentials ...................................................................... 8 Inflation Rate Differentials ..................................................................... 8 Current Account Surpluses/Deficits ........................................................ 9 Public Debt .......................................................................................... 9 Terms of Trade...
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