short yen. Looking at the yen exposure in columns three and six, one sees that most yen-
exposed firms had negative estimated coefficients, except in Indonesia. That is, in most of
the countries, when the yen depreciated against the home currencies, returns went up, not
down. Overall, the exposed firms tended to be long dollars and short yen under a peg.
In sum, this section has shown that the extent of foreign exchange exposure has
been much more widespread with a peg than without one. In effect, firms were less
hedged under pegged exchange rates. Of course this may reflect the limitations of local
financial market development rather than a resistance to hedging. This section has also
shown that the Asia-Pacific firms that are exposed tend to be long dollars and short yen.
This implies that dollar denominated debt was not the primary vehicle of exchange rate
IV. Total Exposure
Bodnar and Wong (2000) emphasize that “residual” exposure estimates – such as
those we have just described and those that now are conventionally reported – measure the
deviation of the firms’ exposure from the exposure of the market portfolio as a whole.
Even when a firm shows no significant exposure in the specifications we have used so far,
the firm nevertheless may be exposed to exchange rate fluctuations if the market return
covaries with the exchange rate. In order to measure the firm’s exposure as a whole, we
drop the local and world returns from Equation 1. That is, we estimate the exchange rate
coefficients in the following regression:
t U S U S t i s r $ , $ 0 , + = E J
t e u r o e u r o s , + E
t s , ¥ ¥ + E
t s , £ £ + E
The results are reported in Table 7.