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Exchange Rate Pegs and Foreign Exchange Exposure in East and South East Asia - page 16 / 33





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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

  • +

    ui,t .

The results are reported in Table 7.


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