FX Exposure Measurement ICF Project. Estimation of FX Equity Exposure 1.Calculate FX Operating Exposure 2.Calculate Leverage Ratio = Total Debt/Firm Value.

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Presentation transcript:

FX Exposure Measurement ICF Project

Estimation of FX Equity Exposure 1.Calculate FX Operating Exposure 2.Calculate Leverage Ratio = Total Debt/Firm Value 3.Calculate Hedging Ratio = Foreign Currency Debt/ Firm Value 4.Calculate FX Equity Exposure =

Estimation of FX Equity Exposure

Can a Firm Estimate Equity Exposure with Actual Stock Returns? This would assume implicitly that stock prices reflect intrinsic stock values. How sensitive actual stock price changes are to the FX changes depends on whether investors recognize how FX changes affect intrinsic value of the firm’s equity.

Method An Analyst typically estimates an empirical FX equity exposure by regressing a time series of a firm’s stock returns against percentage changes in the spot FX price of a currency. FX Equity exposures are computed by regressing monthly stock returns on monthly percentage FX changes. The Standard error represents the estimated standard deviation of the FX equity exposure estimate and provides a guide to statistical significance.

Unlevering Estimated FX Equity Exposure