exposure shows no signs of abating, and it does not appear to diminish under an exchange
rate peg. The exposure among the Asia-Pacific firms is much more widespread than
typically has been reported for firms in the large, western industrialized economies. It also
is more widespread than we find among firms in our benchmark countries, Australia and
We have not investigated whether or not firms should care about this exposure –
whether the exposure is actually priced in the market and whether it should be hedged.
However, economic theory (see e.g., Adler and Dumas, 1983) tells us that foreign
exchange exposure is important when goods markets, not just financial markets, have
barriers. Goods market segmentation implies a kind of financial market segmentation:
when investors’ consumption opportunities differ internationally, the exchange rate will
affect the way they evaluate the random returns to financial assets. The Asia-Pacific
countries studied here vary a great deal in terms of the openness of both their capital
markets and their goods markets. Thus, the foreign exchange exposure that we document
may matter very much in some of them and very little in others. We leave the exploration
of the pricing of exposure and its implications for the development of these markets to
17 However, the extent of exposure we report here is on par with that reported by Dahlquist and Robertsson for a large sample of Swedish firms.