Exchange Rates and the Firm: Strategies to Manage Exposure and the Impact of EMU

179 Pages·1999·1.591 MB·English

by  Richard Friberg (auth.)

EXCHANGE RATES AND THE FIRM
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Exchange Rates and
the Firm
Strategies to Manage Exposure and
the Impact of EMU
Richard Friberg
Research Associate
Stockholm School of Economics
Sweden
First published in Great Britain 1999 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 6XS and London
Companies and representatives throughout the world
A catalogue record for this book is available from the British Library.
ISBN 978-1-349-41053-8 ISBN 978-0-333-98237-2 (eBook)
DOI 10.1057/9780333982372
First published in the United States of America 1999 by
ST. MARTIN’S PRESS, INC.,
Scholarly and Reference Division,
175 Fifth Avenue, New York, N.Y. 10010
Library of Congress Cataloging-in-Publication Data
Friberg, Richard, 1967–
Exchange rates and the firm : strategies to manage exposure and
the impact of EMU / Richard Friberg.
p. cm.
Includes bibliographical references and index.
1. Foreign exchange rates—European Union countries. 2. Economic
and Monetary Union. 3. Monetary unions—European Union countries.
4. Monetary policy—European Union countries. 5. Business
enterprises—European Union countries—Finance. I. Title.
HG3942.F75 1999
332.4'566'094—dc21 98–54943
CIP
©Richard Friberg 1999
Softcover reprint of the hardcover 1st edition 1999 978-0-333-74551-9
All rights reserved. No reproduction, copy or transmission of this publication may be made
without written permission.
No paragraph of this publication may be reproduced, copied or transmitted save with
written permission or in accordance with the provisions of the Copyright, Designs and
Patents Act 1988, or under the terms of any licence permitting limited copying issued by
the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE.
Any person who does any unauthorised act in relation to this publication may be liable to
criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as the author of this work in accordance
with the Copyright, Designs and Patents Act 1988.
This book is printed on paper suitable for recycling and made from fully managed and
sustained forest sources.
10 9 8 7 6 5 4 3 2 1
08 07 06 05 04 03 02 01 00 99
To Dick and Ruth Beesley, for their
extraordinary hospitality
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Contents
List of Figures ix
Preface x
1 Introduction and Scope of the Book 1
Part I The Background
2 Setting the Stage 9
3 What are the Elements of Exposure? 20
4 Should a Firm Manage its Exposure? 23
5 The Instruments Commonly Used for Hedging 33
Part II Economic Exposure
6 Economic Exposure 39
7 The Evidence 46
8 Contractual Exposure 54
9 The Mechanisms and What can be Done about Them –
a Close Look 57
Part III Accounting Exposure
10 Accounting Exposure 103
Part IV EMU
11 A Brief Background 111
12 Accounting Exposure and EMU 116
13 Economic Exposure 119
vii
viii Contents
14 Macroeconomic Issues and their Implications for
Exposure 141
Notes 153
References 161
Index 169
List of Figures
2.1 Pound price of one US dollar, 1993–8 10
2.2 Depreciation against relative inflation (against
US$ 1973–96) 14
2.3 Nominal and real effective exchange rates, United
Kingdom, 1990–7 16
4.1 Value of the firm and the exchange rate, linear
relationship 24
4.2 Value of the firm and the exchange rate, concave
realtionship 26
4.3 Utility and wealth, concave relationship 29
7.1 Operating profits as a share of turnover in Swedish
manufacturing and real exchange rate, 1975–93 49
9.1 Profits and the exchange rate, examples of
relationships 58
9.2 Swiss franc price of one US dollar, 9-month forward rate,
1993–8 62
9.3 Real exchange rate, Switzerland/USA, 1973–97 62
9.4 A stylized international trade transaction 67
9.5 Setting price in the importer’s currency 70
9.6 Setting price in the exporter’s currency 72
9.7 Deviation from the law of one price for Marlboro
cigarettes (one carton of 200 cigarettes) in duty-free
shop, 1990–6 74
9.8 Development of VAT-adjusted retail price of
gasoline (RP) and costs, Sweden, fall 1995 76
11.1 French franc price of one dollar and one D-Mark,
1990–8 112
13.1 Price of Marlboro cigarettes (one carton of
200 cigarettes) in in-flight shop, 1994–8 127
14.1 Nominal and real exchange rate, Sweden 1980–97 144
14.2 Long-term government bond yields, Italy, Netherlands
and Spain, 1990–8 146
ix