ECONOMIC EXPOSURE TO EXCHANGE RATES IN JORDAN COMPANIES: A MONTHLY ECONOMETRIC MODEL OF THE RATE OF RETURN OF FIRMS, 2004-2007

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 are vulnerable as well.  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 an exchange risk model for major Jordanian firms are proposed.  These models were developed and estimated.  Where Rit is the rate of return of firm i, Rmt weighted rate of return of the domestic market or domestic market portfolio, Et rate of change in the exchange rate index or relevant exchange rate, Pjt is the price of the same product or similar product by major competitor, bi is the firm beta, ci is the exchange rate impact on the rate of return (exposure risk). The inclusion of market portfolio return is to capture the impact of all other macroeconomic factors. This paper uses the monthly general stock exchange price index, published by Amman Security Exchange for the period of May 2004 until March 2007. Also, the monthly closing price of a share of “The Arab Potash” is taken at the start of each month from Amman Security Exchange. The average price of Potash per ton in $ is calculated from the data provided by the Jordan’s ministry of industry and trade. There are two major findings of this paper: (1) the models provide useful information on the economic exposure of Jordanian firms; and (2) the firm exchange rate exposure is above the market portfolio exposure.