Exchange Rate Exposure and Systems in Emerging Markets Finance Essay

Exchange rate is the rate of one currency into another. In other words, it has the value of the currency of another country than their own. If you are traveling to another country, you need to "buy"local currency. Like any asset prices, the exchange rate is the price, you can buy that currency. If you are traveling to Egypt, for example, the dollar exchange rate of 1:5.5 Egyptian pounds, which means that for every dollar that you can buy five and a half Egyptian pounds. In theory, the same assets should sell at the same price in different countries, because the intrinsic value of the exchange rate to maintain a currency of another. Over the past few decades have witnessed great turbulence in the practice of the exchange rate, the world's countries: the collapse of the Bretton Woods system, inevitably, through a period of clean and dirty floating, through the wooden pegs, the depreciation of the denied, and more devaluation caused by the floating exchange rate depreciation, the currency board, and the emergence of a common currency in most European countries. Large exchange rate fluctuations or different policies in sharp contrast to the more knowledge-through the slow progress in the logic of economic models and the accumulation of evidence-about alternative exchange rate systems. Not the growth of this knowledge to create a consensus, is not so far, policy-we follow, but there are many places we have slipped to the policy between the application of knowledge, because I will discuss-but thoughtful policy analysis modeled after the process overwhelmed by neglect or cast a vote against the less-than-critical staring at the requirements in the exchange rate and exchange rate systems on a variety of politicians, bureaucrats, reviews, and academics.

1.2 Fixed exchange rate

Under a fixed exchange rate, sometimes called the pegged exchange rate system, is a type of exchange rate regime, the currency's value should the value of other single currency or a basket of currencies of other countries, or other measure of value, Such as gold. Typically use fixed exchange rate stability is the value of a currency pegged to the dollar the currency. Trade and investment, which makes the predictability between the two countries, but more relaxed, more especially for small economies where the form of foreign trade most of GDP (gross domestic product). It can also be used as a means to control inflation. However, when the reference value rises and falls, then the currency pegged to the dollar. Furthermore, according to Mundell - Fleming model with perfect capital mobility, fixed exchange rate to prevent government use domestic monetary policy to achieve macroeconomic stability.

1.3 Floating exchange rate

Significant fluctuations in exchange rates or floating exchange rate is a type of exchange rate regime, allowing the value of money is based on the fluctuations in the foreign exchange market. A currency, called the use of a floating exchange rate floating exchange rate. Some economists believe that in most cases, better fixed exchange rate floating exchange rate. To automatically adjust the floating exchange rate, they make an impact to curb the impact of national and foreign business cycles, and even the possibility of pre-emptive strike a balanced international balance of payments crisis. However, in some cases, the fixed exchange rate may be more stable and more suitable to grasp. This may not necessarily be true, consider the results of the country, trying to bring the price of RMB "strong" or "high" compared to other countries such as Britain or the Asian currency crisis in Southeast Asian countries. Choose between the debate between fixed and floating exchange rate regime is proposed, they argue Mundell - Fleming model cannot simultaneously maintain a fixed exchange rate of the economy, free capital movement, an independent monetary policy. Can choose any two control and left the third to market forces. Appreciation or depreciation in extreme cases, central banks usually intervene to stabilize the currency. Therefore, the floating exchange rate monetary system is known as the more specialized a managed float. The central bank may, for example, allowing the currency to float freely on price, between the lower bound, the price "ceiling " and "House. " Management of the central bank may be a large number of different ways to buy or sell, in order to provide price support or resistance, or, if the currency of some countries, there may be legal sanctions in the context of these transactions.

1.4 Fixed exchange rate versus Floating exchange rate

The floating exchange rate is with the various advantages. First, in the floating exchange rate automatic correct as country just make it free movement of supply and demand balance. Secondly, from external economic activities of insulation as national currency is not dependent on a possible world high inflation under fixed exchange rates. Demand and supply the free flow of help from the world economy fluctuation on the domestic economy. Third, governments can freely choose them as a floating exchange rate policy, will allow domestic any payment imbalance of balance, possible domestic policy implementation automatic correction. Nonetheless, there are also specific concerns about the exchange rate being unstable and uncertain under the floating exchange rate regime. Also, speculation tends to be higher in the floating exchange rate regime, hence leading to more uncertainty especially for traders and investors. Despite its rigidity, the fixed exchange rate regime is still used for several reasons. First, there is certainty in fixed exchange rate. With it, international trade and investment becomes less risky. Second, there is little or no speculation on a fixed exchange rate. However, a fixed exchange rate contradicts the objective of having free markets and it is not able to adjust to shocks swiftly like the floating exchange rate.

1.5 Overview of exchange rate exposure

At the micro-level, know how to in emerging markets, enterprise to exchange rate fluctuations interest are clearly their investors and managers. From a macroeconomic perspective, study the enterprise level exchange rate risk, help to determine channel exchange rate fluctuation effects of emerging economies. This is important because of preious study found that exchange rate devaluation impact on emerging markets and developed markets will be very different. For example, KaErWo and Reinhart (2000) found that devaluation in emerging markets tighten. An expansion of the literature, summarizes agenor, and MengTieEr (1999), provide theoretical interpretation, developing economies tighten devaluation. This and the effect of devaluation standard expansion comparative observation (see Gordon 2000) developed countries. Use of enterprise-level data to analyze macroeconomic problems, this is particularly useful, such as in the business cycle of frequency summary data is often in the quality and the limited number of developing countries. In addition, because "responsibility, dollarization" channel directly related to individual enterprise's balance sheet, it is important to check with their performance depreciation of the influence. Bekaert and Harvey (2003), in the current literature on emerging market financing of comprehensive investigation, observation, used to parse the developed markets, the standard model often is not suitable for processing occurred in emerging markets, specific situation. This observation and there were to exchange rate risk research so. In developed markets researchers usually focused on measure marginal exchange rate risk, to a company's stock exchange rate of return of the depreciation of the influence, for national stock index irr control. The national into stock index is control macroeconomic impact, causing synchronous movement in local currency and a company's stock price impact factor. This measure is often used to estimate the company of some interesting courses of exchange rate risk (such as multinational company or exporters), relative to the national average. However, for the emerging market of the enterprise, is our ability to focus on how they are in absolute meaning of exchange rate fluctuations, while the effect of not important reasons. First of all, to assess the depreciation of the theories discussed above, we need to research the total, but not at the edge of the influence, to exchange rate fluctuations in emerging markets enterprise. Specifically, we are reviewing whether as a class of emerging market enterprise adverse effects, currency devaluation, not just how they perform, relative to their respective countries average interested. Second, Morck, Yang, the more (2000) document within the stock price of the domestic correlated considerably more than developed markets emerging higher level. This synchronization make stock price change is unlikely to emerging market enterprises are facing serious marginal exchange rate risk. Meanwhile, so strong national internal cooperation campaign suggests the possibility of specific countries is an important part of the exchange rate risk. By using the total exposure measures, we can assume for exchange rate risk decision factors for specific national influence; And the peripheral exposure of any nation only measures, concrete influence has been deducted, so it can't identify. In addition, in the more micro level, in emerging markets, investors should care about their investment return given devaluation general response and managers to oneself the value of the company always reaction given exchange rate fluctuation relevant, not just edge react than the national average. Thus, our challenge is to measure total exchange-rate exposure, but at the same time abstract from the confounding macroeconomic shocks. In other words, we need to distinguish between the direct effects of exchange-rate movements on firm value, and the effects of other macroeconomic shocks that simultaneously affect both firm value and exchange rates.

Chapter Two

Literature review

2.1 Chapter overview

For this chapter that is the literature review which propose the significant empirical and theoretical information to estimate the exposure of emerging-market companies to fluctuations in their domestic exchange rates and identifies the total exposure of a company to exchange-rate movements.

2.2 Empirical Literatures

As Adler and DaZhongMa works (1980, 1984) began, Joe dumars (1978), and Howard (1982), there is a study in developed markets, probes into the company's exchange rate risk long list. The main focus of this document is estimated at industry or company level of risk and to investigate their decision factors. For example, Jorion (1990), he and NG (1998) found that foreign sales to the United States and Japan are a multinational company contact of important factor. Allayannis and Ihrig (2001) and beau's, and DaZhongMa Gardner, mascherano meal (2002) research market structure as to exchange rate risk decision of factors. Allayannis and Ihrig establishment and the exchange rate risk and marking the links, and estimate American manufacturing model. Bo Gardner's, and DaZhongMa mascherano meal the scope is export enterprise's exchange rate risk of one "through" the price of exchange rate fluctuations, and estimate the on Japanese exports industry pattern. Griffin and si tuor this (2001) and Williamson (2001) study exchange rate fluctuation industry level the impact of competition. Griffin and si tuor this discovery, the influence is a in Canada, France, Germany, Japan, England, and industrial widely set small American Williamson thinks, the powerful influence for automotive industry, in Japan and the United States more wonderful, griffin and Williamson (2002) and Dominguez and tessa (2001) provide the more detailed this literature review In the method, many studies, including Allayannis and horizon (2001), bo Gardner's and gentleman (1993), Jorion (1990, 1991), and Williamson (2001), exchange rate risk measures as a domestic market index works control variables. Bo Gardner's and yellow (2000) provides take this practice motivation discuss carefully, and further suggests that the market of the construction of the control variables can have a symbol and exposure to estimate the size of the considerable influence. Some research sector does level in the enterprise or some individual emerging market exchange rate risk. Kho and Sweeney tuor this (2000) study of the Asian financial crisis for five of east Asian countries other currency risk banking. They found that a currency risk only in Indonesia and the Philippines department of stocks earn negative influence. Dominguez and tessa (2001) review from eight countries, in which two (Chile andThailand) is emerging market enterprise marginal rate risk. These two countries, they found that both scale of enterprises or foreign sales is an important determinant of exposure, and the industry is a business affiliation relationship in Chile and Thailand two significantly. Parsley and popple (2002) to study how to exchange rate peg influence east Asia enterprise's exchange rate risk, and found a one-to-one currency show outfights them from other currency exposure fixed exchange rate of countries.

Chapter Three

Methodology

3.1 DATA

In this study, it used in the sample from multiple sources establishment. Emerging markets (EMNCs) multinationals and developed countries multinational companies in control group (DMNCs), this list compiled list of annual world investment report published MaoFa meeting of the top multinational companies. Since 1999, all the list published are used to compile EMNCs list. If a company on the list at least once, it was listed in the samples. In addition, transition countries 25 strong multinational companies, top 10 list of multinational companies list published by the eastern world investment reports for research. These sources of combination create 120 multinational companies as a sample of authentication. Once the company create, for the list of Datastream and analysis of data from Thomson research database. O the list of corporate database screening, found that some companies have no relevant data or database of consistent time series. This reduced the company's total sample 106. The final list including from four world (Africa, Asia, Europe and America) area in 16 countries 106 company

3.2 Methodology

The impact of company, industry, region, and country level variables on the exchange rate exposure elasticity was estimated by using pooled time series regression method. Where, is firm is exchange rate exposure elasticity coefficient. The independent Variables in the Cross sectional model are as follows: TS: Total Sales Lev: Leverage Int: Degree of Internationalization C: Country Risk ADR: Access to Intel Capital US: Upstream/ Downstream Dummy R: Region Dummy I: Industry Dummy Virtual variables include single industry, national and regional effect. As for someone says the earlier scale and lever may affect the company's foreign exchange exposure of elasticity, therefore, it is necessary to control these effects. Total assets and total sales increased enterprise scale and the assets and liabilities of the total ratio control to control leverage. The company's internationalization degree also affect exposure, therefore, foreign assets and total assets and proportion of total sales of foreign sales added to the model to control the effect.

Chapter Four

Data Analysis and Research Findings

Foreign exchange market experienced with the actual rate often in the big change bilateral exchange rate fluctuations caused fluctuatio (figure 1 and 2) in recent weeks. These movements of some corresponding adjustment scheme of EO87 policy direction, but on condition that the nominal money valuation of the changes, are made by domestic absorption ability change, make the actual and effective exchange rate adjustment after lasting. In the circumstances, the dollar depreciation (4.2, since September 1 in nominal effective) is desirable support, because it helps to adjust to American production from internal to external balance, demand and ease in the U.S. disinflation risk. By reducing the need of domestic absorption in the dollar is also advantageous in U.S. financial reorganization. Similarly, modest revaluation has in Brazil and emerging market economies and India (in these two countries under the name of 1.1%, effective from September 1) happens should help them contain inflationary pressure, but might aggravate their current-account deficit, unless it is compensation fiscal restraint. Simulation operation and the oecd model suggests that the world new fluctuation of exchange rate is a long-term actual variable has a significant effect to maintain. For example, it needs to be in the two years before, the dollar's external value change provides two, it to the current account complete effect of two-thirds. Table 1 Report and the median average rate risk of emerging markets and developed market multinationals coefficient. Webmasters coefficient in the name of market risk factor. Net enrollment coefficient is the nominal exchange rate risk factor. MaBi coefficient is true market risk factor. Net enrollment coefficient is the real exchange rate risk factor.

The panel table - 1, we report for all the exchange rate risk of a multinational company analysis results (including developed and emerging market) samples. Exposure of the elastic coefficient and the median average, when we use the proxy is the nominal exchange rate and exchange rate 0.00122 0.01645 respectively. Exposure elastic indication change when we use the real exchange rate. The mean and median exposure elasticize is real exchange rate - 0.0146 and - 0.0399. In group B and C we report the exchange rate and the developed countries EMNCs multinational company (DMNCs) exposure analysis results. And although the nominal exchange rate of Proxy EMNCs averages and median exposure flexibility is 0.112 and - - 0.126 respectively corresponding elastic for 0.1148 DMNCs and 0.143. When we use the real exchange rate, the average exposure elasticity reverse signs for both EMNCs and DMNCs Table2 ANOVA-Test of between subjects effects Based on the table 2, we report the variable test between the principal role of results. Type III squares which used in the test. The amended model is 1% significant level. Therefore, expose in emerging markets and developed market coefficient of national equality zero hypotheses was refused. In order to EMNC and quantitative between DMNC group, a simple comparison test is in exchange rate risk difference. In the above analysis, light, namely "zero hypothesis EMNC and DMNC exposure elastic relationship is equal, is in 1% significant level refused. Therefore, we, according to the results of exchange rate risk in emerging markets of multinational companies elastic relationship is significantly lower than developed countries exchange rate risk relationship elastic larger market multinational company. We in this study the main premise is such statistical results confirmed the report. We further analysis, in order to obtain the exchange rate exposed to different enterprises, industry and national level of variables EMNCs elastic relationship model views. Table 3 contrast result of ANOVA Table 4 Cross tabs between foreign asset and magnitude of RER exposure Table 5 Cross tabs between foreign sales and magnitude of RER exposure Table 6 Cross tabs between FSTS ratio and magnitude of RER exposure Based on this analysis, 4, 5, 6 from the table, we examine the link between exposure to the size of the elastic EMNCs and absolute size (Table 4) foreign assets, Hollywood's overseas sales (Table 5) and foreign sales total sales Ratio (Table 4). Cross tabulation results clearly point out the positive and statistically significant link between the size of foreign participation and exposure of the agent's coefficient. Clearly recognized the significance of these results to determine the degree of international participation, because the size of exposure. Table 7 Cross tabs between countries and magnitude of RER exposure Table 8 In table 7 into each area countries further find interesting model are as follows: to 1% level, all from Argentina, Singapore and south Korean companies have higher real exchange rate risk elastic coefficient. By contrast, the Philippines, all from Hungary, Poland, the Russian federation, Taiwan EMNCs worked in Slovenia 1% level significantly lower risk factor. Results must be in each specimen with because enterprise the inequalities of the number of countries that carefully ealuated. In table 8 into each area further breakdown of all countries found below interesting mode: 1% level, from India, Malaysia, the Philippines, the Russian federation, Singapore, South Korea, Taiwan all enterprise DouZhengShi elastic coefficient exchange rate risk.

By contrast, from Argentina EMNCs all once at 1% level significantly lower risk factor. Results must be in each specimen with because enterprise the inequalities of the number of countries that carefully ealuated. Table 9 Pooled Time Series Results According to the table 9 as robustness examination, we focus on multiple time series analysis. We think, the scale of the enterprise, financial lever degree, multinational company, enter the international capital degree, and as the real exchange rate flexibility theoretically reasonable risk factors upstream investment. Results reported the regional virtual variable abnormalities, and in all the variables in the statistical model putong 5% significant level significantly. The total sales' variable is used as the agency's scale and our results suggest that this is an exchange rate risk of important decision factors. The size of the theoretical symbol may be because of the two factors offset ambiguous: on the one hand big companies are more likely to engage in foreign business, it may have a higher risk of currency. On the other hand, they are more likely to have enough resources to manage its exchange rate risk

Chapter Five

Conclusion

The study reflects our attempts to understand as compared, in the DMNCs EMNCs exchange rate risk of nature. Presumably, this EMNCs exposure will in a DMNCs this larger. It appears three important discoveries, from our analysis. Below summarizes these results to First of all, our empirical results show that our sample 60 per cent of the multinational company has significant bear the risk of exchange rate fluctuations. Although common currency influence multinational company that value, empirically limited literature. Relative to in this field, including exposure company reports proportion generally less than 25%, in this study, the early work, we found that is rather high in proportion. Higher percentage in this study can partly in the calculation of the exchange rate risk, USES the method. The results can also be caused by sampling method, we used in this study. Although our sample is random, we think this is the reason for EMNCs representative discused. However, we can't rule out the possibility of a sampling bias. The second import our research findings were EMNCs substantially more vulnerable to exchange rate than developed countries peer rate factors. In some cases, this is due to emerging market inherent risks properties and/or system empty could limit in emerging markets, under the condition of the effective monetary risk management of universality. Finally, our third found in our study, EMNCs mainly there are real exchange rate risk, and DMNCs has a huge negative real exchange rate risk. The real exchange rate risk of positive can be attributed to import tendencies or big or foreign currency debt. Because in this example is used in EMNCs has significant foreign sales, import orientation argument itself insufficient to explain our findings. This causes inference EMNCs should have considerable balance sheet, this is consistent with the reality of foreign currency exchange rate risk liability. The positive relationship between leverage and magnitude of exposure lend further support to this conclusion.

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