Foreign Exchange Exposure: A Case Study of Non-financial Firms in UK

Abstract

This paper examines the foreign exchange exposure of UK non-financial listed companies over the period January 2005 to December 2010 and compares to two sub periods - pre-recession period (2005-2007) and recession/post- recession period (2008-2010). The Jorion (1991) model is used to estimate the exchange rate exposure - change in exchange rate is regressed on firms' abnormal returns. The findings reveal no supporting evidence for a contemporaneous relationship over total sample period and recession/post-recession sub period but the existence of a contemporaneous relationship during the pre-recession sub period cannot be rejected. Given the change in economic conditions around the recession period (the year 2008 is chosen as the break point) The analysis may be beneficial to financial managers in formulating hedging strategies, as hedging requires additional cost along with forgone profit if hedging is not the optimal decision, when faced with favorab/e/adverse economic conditions. This study may also be beneficial for investors to make informed investment decisions.