Estimating Exchange Rate Exposure of Trade-intensive Firms: Application to Korean Oil-refiners and Petrochemicals

The purpose of this paper is to empirically investigate exchange rate exposure of Korean oil-refining and petrochemical firms whose profit structure highly depends on exchange rate changes. The primary finding is that about 50% out of the total sample firms is significantly exposed to exchange rate changes when the changes are sizable. In terms of exchange rate type, a bilateral rate between US dollar and Korean won is found to be more effective for estimating significant exposure of the Korean oil-refiners and petrochemicals rather than an industry-specific exchange rate index. In addition, using the Fama and French decomposition approach, this paper finds exposure sensitivity factors with results that conglomerate affiliation, number of employees, or business scope diversification significantly lowers degree of exposure.