Incorporating Exchange Rate Exposure Asymmetries: A Firm Level Study

On the basis that the sources of sign and magnitude asymmetries of exchange rate exposure are largely related to each other, this paper attempts to capture both types of exposure asymmetries in tandem. In addition, the overall impact of incorporating exposure asymmetries on returns is also investigated. The study offers several important findings: (a) there is evidence for the presence of both types of asymmetries; (b) measuring overall impact of asymmetries in terms of a combined coefficient is as important as measuring the individual components of asymmetries mainly because the presence/absence of the latter does not necessarily guarantee the presence/absence of the former; (c) as it can work in either direction, it is not appropriate to make generalizations like incorporating asymmetries always leads to more/less exchange rate exposure; and (d) the exposure coefficients estimated by the models that do not capture sign and magnitude asymmetries may seriously under/overestimate the exposure to exchange rate risk.