Our findings can be summarized easily. First, many Asia-Pacific firms show
significant exposure to fluctuations in one or more of the four major currencies: the U.S.
dollar, the euro (deutschmark prior to 1999), the yen, and the pound. This finding
contrasts with the results of past studies, few of which have found much exchange rate
exposure at all.3,4 Second, we find that countries with exchange rates that are fixed against
a single currency (as is usual) exhibit no less exposure against the other major currencies.
Finally, we find that the exchange rate exposure has not diminished over time.
Gauging Foreign Exchange Exposure
To gauge foreign exchange exposure, we follow in the tradition of Adler and
Dumas (1984). They define foreign exchange exposure in terms of a regression of asset
value on the exchange rate. Our work also builds closely on that of Dahlquist and
Robertsson (2001), Dominguez and Tesar (2001a, 2001b), Wong (forthcoming), Bodnar
and Marston (forthcoming), Allayannis and Ofek (2001), Chamberlain, Howe, and Popper
(1997), Chow, Lee, and Solt (1997), Bodnar and Gentry (1993), and Jorion (1990) who all
take related approaches. In keeping with most of this work, we first estimate the exposure
2 In emphasizing the distinctions between residual and total exposure, we are following Bodnar and Wong (2000).
3 Most of those studies have focused on firms in the United States or in large European countries. By and large, they have estimated the firm exposure to a weighted-average of exchange rates. One important exception is Dahlquist and Robertsson (2001), who use individual exchange rates and find exposure among Swedish firms. Other exceptions (in terms of finding significant exposure) include Chamberlain, Howe, and Popper (1997) who find exchange rate exposure for U.S. banks using trade-weighted exchange rates, and Chow, Lee, and Solt (1997) who find exposure at long horizons.
4 The absence of observable exposure may reflect hedging by firms. Bodnar and Marston (forthcoming) provide evidence that operational hedging may have been important in reducing the exposure of many U.S. firms. Financial hedges are examined by Allayannis and Ofek (2001), and by Chamberlain, Howe, and Popper (1997). Both studies find the use of derivatives to be associated with reduced exposure. (Allayannis and Ofek examine U.S. nonfinancial firms; while Chamberlain, Howe, and Popper examine U.S. banks.)