Economic Exposure

Jordan's exports and imports represent more than 36% and 81% of Jordan's GDP respectively. Therefore, not only is Jordan's economy highly vulnerable to change in the exchange rate, but also individual firm performances. The sensitivity of the firms' future income to exchange rates change is a necessary measure for the risk management of the firm, since economic exposure of the firm affects the profit and the value of the firm. Two variants of exchange risk model for a major Jordanian firm are proposed. These models were developed and estimated. There are three major finding of this paper: (1) the models provide useful information on the economic exposure of Jordanian firms; (2) the firm exchange rate exposure is above the market portfolio exposure; and (3) the chief financial officers have better understanding of transaction or translational exposure than they have of economic exposure