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Exchange Rate Pegs and Foreign Exchange Exposure in East and South East Asia - page 18 / 33

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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

New Zealand.17

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

future research.

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.

17

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