The Effects of Industry Structure on Economic Exposure / Richard C. Marston.

By:

Marston, Richard C

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5518.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Subject(s):

F3 - International Finance

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: A firm is subject to `economic exposure' if changes in exchange rates affect the firm's value, as measured by the present value of its future cash flows. This paper shows that in many forms of competition, including the most commonly studied case of monopoly, the economic exposure of an exporting firm is simply proportional to the firm's net revenues based in foreign currency. So the firm's hedging strategy is simple: sell foreign currency futures equal to the value of its net revenues in foreign currency. This simple result breaks down under some, but not all, forms of competition between the exporting firm and local firms. In that case, the exporting firm needs to know about the price elasticity of its product demand and its marginal cost in order to assess its exposure to exchange rates. So its hedging strategy also requires detailed knowledge of demand and cost conditions. The key determinant of economic exposure, therefore, is the competitive structure of the industry in which a firm operates.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5518 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

March 1996.

A firm is subject to `economic exposure' if changes in exchange rates affect the firm's value, as measured by the present value of its future cash flows. This paper shows that in many forms of competition, including the most commonly studied case of monopoly, the economic exposure of an exporting firm is simply proportional to the firm's net revenues based in foreign currency. So the firm's hedging strategy is simple: sell foreign currency futures equal to the value of its net revenues in foreign currency. This simple result breaks down under some, but not all, forms of competition between the exporting firm and local firms. In that case, the exporting firm needs to know about the price elasticity of its product demand and its marginal cost in order to assess its exposure to exchange rates. So its hedging strategy also requires detailed knowledge of demand and cost conditions. The key determinant of economic exposure, therefore, is the competitive structure of the industry in which a firm operates.