Are domestic firms exposed to similar currency risk as international trading firms?

Mohamed Ariff Syed Mohamed, Alireza Zarei

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Abstract

This paper reports key findings about currency risk using two samples of listed firms: one sample with zero foreign currency revenues, hence having zero-currency risk; and the other sample with positive revenues in foreign currencies from foreign transactions. The latter is therefore, exposed to currency risk. Asset pricing theories predict that stocks of currency-risk-exposed firms should suffer significant currency risk, while those firms with zero-currency-risk should not have any effect from currency risk since currency transactions across borders is nil. The latter hypothesis has yet to be tested explicitly, so there is a gap in the literature. We report stock returns are significantly affected not just for firms with foreign-currency revenues but also for firms with zero foreign-currency transactions. These findings are useful to top management of all businesses to undertake currency-hedge plans for both domestic and international trading firms.
Original languageEnglish
Pages (from-to)25-56
Number of pages32
JournalInternational Journal of Banking and Finance
Volume17
Issue number2
DOIs
Publication statusPublished - 27 Jun 2022

Bibliographical note

This work is licensed under a Creative Commons Attribution 4.0 International License.

Keywords

  • Exchange rate
  • direct vs indirect exposure
  • panel regression
  • Australian dollar
  • pooled vs fixed vs random effectspooled vs fixed vs random effects

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