Exchange rate exposure and risk management: The case of Japanese exporting firms |
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| Institution: | 1. School of International and Public Affairs, Columbia University, IAB Rm 927, MC 3333, 420 West 118th St., New York, NY 20017, USA;2. National Graduate Institute for Policy Studies;3. Faculty of Commerce, Chuo University, 742-1 Higashinakano Hachioji-shi, Tokyo 192-0393, Japan;4. Department of Economics, Yokohama National University, 79-1 Tokiwadai, Hodogaya-ku, Yokohama 240-8501, Japan;5. Faculty of Economics, Gakushuin University, 1-5-1 Mejiro, Toshima-ku, Tokyo 171-8588, Japan;1. Department of Industrial and System Engineering, Hosei University, 3-7-2, Kajino-cho, Koganei, Tokyo, 184-8584, Japan;2. School of Business, Aoyama-Gakuin University, Japan;3. Department of Economics and Finance, City University of Hong Kong, Hong Kong;1. Department of Accounting, Banking and Financial Sciences, College of Business Administration and Economics, Al-Hussein Bin Talal University, PO Box (20), Ma''an 71111, Jordan,;2. School of Business, University of the Sunshine Coast, Maroochydore DC, Queensland 4558, Australia;3. IGSB, University of South Australia, Adelaide, South Australia 5001, Australia |
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| Abstract: | This paper investigates the relationship between Japanese firms’ exposure to the exchange rate risk and their risk management. Following Dominguez (1998) and others, we first estimate the firms’ exposure to the exchange rate risk by regressing their stock prices on the exchange rate and the market portfolio. We next investigate possible influences of various risk management measures on the firms’ foreign exchange exposure. Risk management variables include financial and operational hedging, the invoice currency choice, and the price revision strategy (pass-through) of 227 listed firms in 2009, which were collected from a questionnaire survey of Japanese firms listed in the Tokyo Stock Exchange. Our main findings are as follows: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure, judged by the market. Second, the higher the US dollar invoicing share, the greater the foreign exchange exposure is, which can be reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use a combination of risk management tools to mitigate the degree of exchange rate risk. |
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