FX Equity Exposure and foreign Exchange Rate Sensitivity of Stock Prices:A Study of Exporting and Importing FIRMS in India

Volatile foreign exchange rates may adversely affect a firm's revenues streams, cost structure, operating cash flows, net cash flows and even its equity prices. Present paper is an attempt to measure various foreign exchange exposures like FX Operating Exposure, FX Net Cash Flow Exposure, and FX Equity Exposure for Indian exporting and importing firms. Exporting firms includes firms from three industries namely, Information Technology, Automobile, and Textile, while importing firms include Oil&Gas sector firms. FX Equity Exposures are calculated by considering the respective firm's FX Operating Exposures, financial leverage, and use of foreign currency/home currency debt. A listed firm can also estimate its FX equity exposure using regression between actual stock returns and percentage changes in FX value of foreign currency. Regression based estimation presents the post hedging position of FX equity exposures, while calculated FX equity exposures are based on raw data, without considering the off-balance sheet hedging instruments like forwards, futures, options and currency swaps. Results shows that regression based method yields significantly lower value of FX equity exposure in comparison to the operating exposure based method.