Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals

Ibrahim Zubairu; Ahmed Jamal Iddrisu

doi:doi:10.11648/j.ijefm.20190704.11

| Peer-Reviewed |

Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals

Ibrahim Zubairu, Ahmed Jamal Iddrisu

Received: 7 April 2019 Accepted: 17 June 2019 Published: 7 August 2019

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

The purpose of this study is to investigate the determinants of differential exchange exposure across listed UK Multinational Corporations (MNCs) from 1993-2013, so as to identify their relationships regarding their foreign operations as listed on the FTSE 350 Index. The study used quantitative analysis to reach its conclusions. This involves a time series regression analysis which was used to compute the foreign exchange exposure co-efficient. The conclusions from this analysis are summarized. Data was collected from accounting footnotes of financial statements from FAME and the DataStream on Compustat Geographical system database; while annual data updated annually about trade weights within the region was obtained from the International Monetary Fund’s Directory of Trade statistics yearbook. The results suggest that 20% of the sampled MNCs have statistically significant exposure at the 5% level significance, and the regression estimates of the determinants of exchange rate exposure suggests that, the level of a firm’s foreign sales, market value of its equity, and quick ratio, have strong combined explanatory power for exposure. The cross-sectional differences in the degree of exchange rate exposure are negatively related to firm size and positively related to the degree of foreign operation. Firm liquidity is shown to be a determinant of exchange exposure. Other firm characteristic variables have weak or are of no significance in terms of explaining exposure. The results from this empirical study build upon prior studies on foreign exchange exposure and offer the MNCs an alternative approach to minimize their inputs when operating in a developed market.

DOI	10.11648/j.ijefm.20190704.11
Published in	International Journal of Economics, Finance and Management Sciences (Volume 7, Issue 4, August 2019)
Page(s)	95-102
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Foreign Exchange Exposure, UK Multinationals, FTSE350, Hedging Incentives, Firm-Specific Factors and Industry Characteristics

References

[1]	Amihud Y. (1994). Evidence on Exchange Rates and the Valuation of Equity Shares; in Y. Amihud and R. M. Levich eds… Exhange Rate and Corporate Performance (Irwin Professional Publishing, New York).
[2]	Bartov, E. and G. M. Bodnar, (1994). “Firm Valuation, Earnings Expectations, and the Exchange Rate Exposure Effect.” Journal of Finance 49, 1755-1785.
[3]	Cornelius P. (2011) Exchange Rate Risk: Fund Investments and Currency Movements. International Journal of Investments and Equity Finance. Vol. 2 (3), 26-38.
[4]	EDC – Export Development Canada (2010) Managing Foreign Exchange Risk. White Paper Number WP-MFER-0310.
[5]	Griffin and Stulz, R. M, (2001). International Competition and Exchange Rate Shocks: A Cross-Country industry Analysis, Review of Financial Studies, 215-241.
[6]	He, J. and L. K. Ng, (1998). “The Foreign Exchange Exposure of Japanese Multinational Corporations.” Journal of Finance 53, 733-753.
[7]	Ivanova S. (2007) Foreign Exchange Exposure of UK Multinationals: A Research on the Profitability Effect of Foreign Sales and Foreign Assets. Masters Thesis-Universitat Maastricht; Faculty of Economics and Business Administration, Netherlands.
[8]	Jorion, P. (1990). “The Exchange-Rate Exposure of U.S. Multinationals.” Journal of Business 63, 331-345.
[9]	Kumar R. (2014). Foreign Exchange Risk Management; Stock Markets Derivatives Markets and Foreign Exchange Markets. In Strategies of Banks and Other Financial Institutions; 46 (5); 256- 296.
[10]	Alssayah A. and Krishnamurti C. (2013) Theoretical Framework of Foreign Exchange Exposure, Competition and Market Vaues of Domestic Corporations. International Journal of Economics and Finance. Vol. 5, No. 2. E-ISSN.1916-9728.
[11]	Marston, R. (2001). The effects of industry structure on economic exposure”, Journal of International Money and Finance, 20, 149-164.
[12]	Bodnar, G. M. and F. Wong, (2001). Estimating Exchange Rate Exposure: Issues in model a structure, Financial Management, 32, 35-67.
[13]	Picardo E. (2017) Exchange Rate Risk: Economic Exposure. Journal of Finance and Economics. Vol. 6 (1), 253-261.
[14]	El-Masry A., Abdel-Samed O. and Alatraby A. (2007) The Exchange Rate Exposure of UK Non- financial Companies. Managerial Finance Vol. 33 No. 9; 620-641. Emerald Group Publishing Limited.
[15]	Muller, A., & Verschoor, W. F. C. (2008). The Latin American Exchange Exposure of US Multinationals. Journal of Multinal Financial Management; Issue No. 18, Pp 112-130.
[16]	Fornés G. (2009) Foreign Exchange Exposure in Emerging Markets: A study of Spanish Companies in Latin America. International Journal of Emerging Markets; Vol. 4 Issue 1; 6-25. Emerald Group Publishing Ltd.
[17]	Marker S. D. and Huffman S. P (2008). UK Multinationals’ Effective Use of Financial Currency- Hedge Techniques: Estimating and Explaining Foreign Exchange Exposure Using Bilateral Exchange Rates. Journal of International Financial Management & Accounting; 19: 219-235. DOI:1111/j.1467-646X.2008.01022. x.
[18]	Faff R. W. and Marshall A. (2005). International Evidence on the Determinants of Foreign Exchange Rate Exposure of Multinational Corporations. Journal of International Business Studies. Palgrave Macmillan Journals Vol. 36, No. 5; 539-558.
[19]	Zubeiru S., Osei K. A., and Adjasi K. D. (2007) Foreign Exchange Risk Exposure of Listed Companies in Ghana. The Journal of Risk Finance. Vol. 8 No. 4; 380-393. Emerald Group Publishing Ltd.
[20]	Smith, S. W. and R. M. Stulz, (1985). “The Determinants of Firms’ Hedging Policies.” Journal of Financial and Quantitative Analysis 20, 391-405.
[21]	Occhino F. (2010) Is Debt Overhang Causing Firms to Under Invest? Economic Commentary, Federal Reserve, Bank of Cleveland. ISSN 0428-1276.
[22]	La Rocca, M., La Rocca, T., and Cariola, A. (2007). Overinvestment and Underinvestment Problems: Determining Factors, Consequences and Solutions. Corporate Ownership & Control, Vol; 5 (1), 79-95.
[23]	Myers, S. C. (1977). “Determinants of Corporate Borrowing”, Journal of Financial Economics, Vol. 5, pp. 147-175.
[24]	Froot, K. A, Scharfstein, D. S and K. Froot, (1993). “Risk Management: Coordinating Investment and Financing Policies”. Journal of Finance, 48, 1629-1658.
[25]	Shawky H. A., and Wang Y. (2014) Liquidity Risk and Economies of Scale in Funds of Hedge Funds. The Journal of Alternative Investments. Vol. 17 (2), 51-67.
[26]	Allayannis G. and Ihrig J. (2001) “Exposure Markups” Review of Financial Studies, 14, 805-835.
[27]	Nance, D. R., C. W. Smith Jr., and C. W. Smithson, (1993). “On the Determinants of Corporate Hedging.” Journal of Finance 48, 391- 405.
[28]	Géczy, C., Minton B. A and Schrand C. 1997. “Why Firms Use Currency Derivatives.” Journal of Finance 52, 1323-1354.
[29]	Bartram S. M., Brown G. W., and Fehle F. R. (2003), International Evidence on Financial Derivatives Use, Working Paper – WP10233.
[30]	Allayannis G., and Ofek E. (2001), Exchange-Rate Exposure, Hedging and the Use of Foreign Currency Derivatives, Journal of International Money and Finance, Vol. 20, pp. 273-296.
[31]	Solakoghu M. N. (2005) Exchange Rate Exposure and Firm Specific Factors: Evidence from Turkey; Journal of Economics and Social Research, 7 (2), 35-46.
[32]	Bodnar, G. M. and Gentry, W. M. (1993). “Exchange-rate exposure and Industry characteristics: Evidence from Canada, Japan, and the U.S.” Journal of International Money and Finance 12, 29-45.
[33]	Williamson, R, (2001). Exchange Rate exposure and Competition: Evidence from the Automotive Industry, Journal of Financial Economics, 59, 441-475.
[34]	Dullforce A. B (2012) FT350. The Financial Times Ltd
[35]	Dominguez, K. M. and Tesar L., (2006). “Exchange Rate Exposure”. Journal of International Economics, 68, 188-218.
[36]	Zobia I. A. (2015) The Efficiency of Exchange Rate Market: A Case Study on Pakistan. International Journal of Economics, Finance and Management Sciences; Vol. 3, No. 2, 2015, pp. 125-137. DOI: 10.11648/j.ijefm.20150302.17.

Cite This Article

Plain Text BibTeX RIS

APA Style

Ibrahim Zubairu, Ahmed Jamal Iddrisu. (2019). Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals. International Journal of Economics, Finance and Management Sciences, 7(4), 95-102. https://doi.org/10.11648/j.ijefm.20190704.11

Copy | Download

ACS Style

Ibrahim Zubairu; Ahmed Jamal Iddrisu. Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals. Int. J. Econ. Finance Manag. Sci. 2019, 7(4), 95-102. doi: 10.11648/j.ijefm.20190704.11

Copy | Download

AMA Style

Ibrahim Zubairu, Ahmed Jamal Iddrisu. Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals. Int J Econ Finance Manag Sci. 2019;7(4):95-102. doi: 10.11648/j.ijefm.20190704.11

Copy | Download

@article{10.11648/j.ijefm.20190704.11,
  author = {Ibrahim Zubairu and Ahmed Jamal Iddrisu},
  title = {Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {7},
  number = {4},
  pages = {95-102},
  doi = {10.11648/j.ijefm.20190704.11},
  url = {https://doi.org/10.11648/j.ijefm.20190704.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20190704.11},
  abstract = {The purpose of this study is to investigate the determinants of differential exchange exposure across listed UK Multinational Corporations (MNCs) from 1993-2013, so as to identify their relationships regarding their foreign operations as listed on the FTSE 350 Index. The study used quantitative analysis to reach its conclusions. This involves a time series regression analysis which was used to compute the foreign exchange exposure co-efficient. The conclusions from this analysis are summarized. Data was collected from accounting footnotes of financial statements from FAME and the DataStream on Compustat Geographical system database; while annual data updated annually about trade weights within the region was obtained from the International Monetary Fund’s Directory of Trade statistics yearbook. The results suggest that 20% of the sampled MNCs have statistically significant exposure at the 5% level significance, and the regression estimates of the determinants of exchange rate exposure suggests that, the level of a firm’s foreign sales, market value of its equity, and quick ratio, have strong combined explanatory power for exposure. The cross-sectional differences in the degree of exchange rate exposure are negatively related to firm size and positively related to the degree of foreign operation. Firm liquidity is shown to be a determinant of exchange exposure. Other firm characteristic variables have weak or are of no significance in terms of explaining exposure. The results from this empirical study build upon prior studies on foreign exchange exposure and offer the MNCs an alternative approach to minimize their inputs when operating in a developed market.},
 year = {2019}
}

Copy | Download

TY  - JOUR
T1  - Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals
AU  - Ibrahim Zubairu
AU  - Ahmed Jamal Iddrisu
Y1  - 2019/08/07
PY  - 2019
N1  - https://doi.org/10.11648/j.ijefm.20190704.11
DO  - 10.11648/j.ijefm.20190704.11
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 95
EP  - 102
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20190704.11
AB  - The purpose of this study is to investigate the determinants of differential exchange exposure across listed UK Multinational Corporations (MNCs) from 1993-2013, so as to identify their relationships regarding their foreign operations as listed on the FTSE 350 Index. The study used quantitative analysis to reach its conclusions. This involves a time series regression analysis which was used to compute the foreign exchange exposure co-efficient. The conclusions from this analysis are summarized. Data was collected from accounting footnotes of financial statements from FAME and the DataStream on Compustat Geographical system database; while annual data updated annually about trade weights within the region was obtained from the International Monetary Fund’s Directory of Trade statistics yearbook. The results suggest that 20% of the sampled MNCs have statistically significant exposure at the 5% level significance, and the regression estimates of the determinants of exchange rate exposure suggests that, the level of a firm’s foreign sales, market value of its equity, and quick ratio, have strong combined explanatory power for exposure. The cross-sectional differences in the degree of exchange rate exposure are negatively related to firm size and positively related to the degree of foreign operation. Firm liquidity is shown to be a determinant of exchange exposure. Other firm characteristic variables have weak or are of no significance in terms of explaining exposure. The results from this empirical study build upon prior studies on foreign exchange exposure and offer the MNCs an alternative approach to minimize their inputs when operating in a developed market.
VL  - 7
IS  - 4
ER  -

Copy | Download

Author Information

Ibrahim Zubairu

Department of Accounting and Finance, Accra Technical University, Accra, Ghana
Ahmed Jamal Iddrisu

Department of Banking and Finance, University of Professional Studies, Accra, Ghana

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Ibrahim Zubairu, Ahmed Jamal Iddrisu. (2019). Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals. International Journal of Economics, Finance and Management Sciences, 7(4), 95-102. https://doi.org/10.11648/j.ijefm.20190704.11

Copy | Download

ACS Style

Ibrahim Zubairu; Ahmed Jamal Iddrisu. Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals. Int. J. Econ. Finance Manag. Sci. 2019, 7(4), 95-102. doi: 10.11648/j.ijefm.20190704.11

Copy | Download

AMA Style

Ibrahim Zubairu, Ahmed Jamal Iddrisu. Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals. Int J Econ Finance Manag Sci. 2019;7(4):95-102. doi: 10.11648/j.ijefm.20190704.11

Copy | Download

@article{10.11648/j.ijefm.20190704.11,
  author = {Ibrahim Zubairu and Ahmed Jamal Iddrisu},
  title = {Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {7},
  number = {4},
  pages = {95-102},
  doi = {10.11648/j.ijefm.20190704.11},
  url = {https://doi.org/10.11648/j.ijefm.20190704.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20190704.11},
  abstract = {The purpose of this study is to investigate the determinants of differential exchange exposure across listed UK Multinational Corporations (MNCs) from 1993-2013, so as to identify their relationships regarding their foreign operations as listed on the FTSE 350 Index. The study used quantitative analysis to reach its conclusions. This involves a time series regression analysis which was used to compute the foreign exchange exposure co-efficient. The conclusions from this analysis are summarized. Data was collected from accounting footnotes of financial statements from FAME and the DataStream on Compustat Geographical system database; while annual data updated annually about trade weights within the region was obtained from the International Monetary Fund’s Directory of Trade statistics yearbook. The results suggest that 20% of the sampled MNCs have statistically significant exposure at the 5% level significance, and the regression estimates of the determinants of exchange rate exposure suggests that, the level of a firm’s foreign sales, market value of its equity, and quick ratio, have strong combined explanatory power for exposure. The cross-sectional differences in the degree of exchange rate exposure are negatively related to firm size and positively related to the degree of foreign operation. Firm liquidity is shown to be a determinant of exchange exposure. Other firm characteristic variables have weak or are of no significance in terms of explaining exposure. The results from this empirical study build upon prior studies on foreign exchange exposure and offer the MNCs an alternative approach to minimize their inputs when operating in a developed market.},
 year = {2019}
}

Copy | Download

TY  - JOUR
T1  - Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals
AU  - Ibrahim Zubairu
AU  - Ahmed Jamal Iddrisu
Y1  - 2019/08/07
PY  - 2019
N1  - https://doi.org/10.11648/j.ijefm.20190704.11
DO  - 10.11648/j.ijefm.20190704.11
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 95
EP  - 102
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20190704.11
AB  - The purpose of this study is to investigate the determinants of differential exchange exposure across listed UK Multinational Corporations (MNCs) from 1993-2013, so as to identify their relationships regarding their foreign operations as listed on the FTSE 350 Index. The study used quantitative analysis to reach its conclusions. This involves a time series regression analysis which was used to compute the foreign exchange exposure co-efficient. The conclusions from this analysis are summarized. Data was collected from accounting footnotes of financial statements from FAME and the DataStream on Compustat Geographical system database; while annual data updated annually about trade weights within the region was obtained from the International Monetary Fund’s Directory of Trade statistics yearbook. The results suggest that 20% of the sampled MNCs have statistically significant exposure at the 5% level significance, and the regression estimates of the determinants of exchange rate exposure suggests that, the level of a firm’s foreign sales, market value of its equity, and quick ratio, have strong combined explanatory power for exposure. The cross-sectional differences in the degree of exchange rate exposure are negatively related to firm size and positively related to the degree of foreign operation. Firm liquidity is shown to be a determinant of exchange exposure. Other firm characteristic variables have weak or are of no significance in terms of explaining exposure. The results from this empirical study build upon prior studies on foreign exchange exposure and offer the MNCs an alternative approach to minimize their inputs when operating in a developed market.
VL  - 7
IS  - 4
ER  -

Copy | Download