Working Paper: NBER ID: w21040
Authors: Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
Abstract: This paper investigates the relationship between the Japanese firms’ exposure to the exchange rate risk and risk management, such as choice of invoicing currency, and financial and operational hedge. The firm’s exposure to the exchange rate risk is estimated by co-movements of the stock prices and exchange rates, following Dominguez (1998) and others. Data on risk management measures—financial and operational hedging, the choice of invoice currency and the price revision strategy (pass-through)—were collected from a questionnaire survey covering all Tokyo Stock Exchange listed firms in 2009. Results show the followings: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure. Second, the higher the US dollar invoicing share, the greater is the foreign exchange exposure. But, risk is reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use the combination of risk management tools to mitigate the degree of the exchange rate risk.
Keywords: exchange rate risk; Japanese exporting firms; risk management; invoicing currency; financial hedging; operational hedging
JEL Codes: F31; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dependency on foreign sales (F10) | Exchange rate exposure (F31) |
| Higher U.S. dollar invoicing share (F31) | Exchange rate exposure (F31) |
| Financial and operational hedging (G29) | Exchange rate exposure (F31) |
| Yen invoicing (F31) | Exchange rate exposure (F31) |
| Price revision strategies (D40) | Exchange rate exposure (F31) |