Exchange Rate Exposure Revisited

Our model decomposes the exchange rate exposure into two parts; individual and systematic ones. The former is the residual one that the past studies have mainly examined. The latter is the product of the exposure of the market portfolio and a firm's market beta, which reflects the exogenous shock of the exchange rate to an macroeconomy. When the effect of exchange rate is widespread and systematic, this effect may be treated as a political factor beyond the hedging skills of individual firms. Using the Japanese data, we find that the Japanese firms are systematically exposed to exchange rate after 2000. We evaluate that the yen selling intervention by the Bank of Japan is timely in facing the significant systematic exposure of the Japanese firms during 2000s