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

Format:

Book

Author/Creator:

Marston, Richard C.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5518.

NBER working paper series no. w5518

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

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.

Notes:

Print version record

March 1996.