Exchange rate movements can affect an individual investor who owns a portfolio consisting of securities in different currencies, multinational company (MNC) with subsidiaries and branches in foreign locations, an exporter/importer who concentrates on international trade and even a firm that has no direct international activities. In addition, the literature to date indicates that exchange rate exposure varies across industries. However, the empirical evidence on the impact of exchange rates on firm value is not conclusive which is surprising in view of the considerable exchange rate fluctuations over the last two decades.
Pick up a sample of companies from the list of countries given below. The data should include: weekly share prices, national market price index and US$ to the local currency exchange rate. The data should cover the period from 2001-2011.
You are required to:
a) Using a time-series regression model, estimate the exposure to exchange rate risk. You need to use the return on market index as a control variable.
b) Discuss your results and explain why some companies (industries) have/ have not a significant exposure to exchange rate and interest rate risks
c) Compare and contrast your results with previous studies in the area.
d) The empirical evidence on the impact of exchange rates on firm value is not conclusive and contradicts with the theory. Discuss why empirical studies do not support the theory.
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