DETERMINANTS OF FOREIGN EXCHANGE RATE EXPOSURE: EVIDENCE FROM PAKISTAN

Abstract

The study investigates foreign exchange rate exposure of 59 non financial firms listed in Karachi stock exchange (KSE). The time period of the study is 2006- 2010 and three industries have been included. The foreign exchange rate exposure of firms has been measured by multi currency rate model the exchange rates includes rupees to US dollar, Rupees to yen, rupees to UK pound and rupees to Euro . Firms found positively exposed to US dollar and negatively exposed to Euro. Different time horizon such as weekly, monthly and quarterly is used in linear and non linear model. Further in the study important determinants of foreign exchange rate exposure have been identified such as Export ratio, firm’s size, Growth opportunity, Leverage, Liquidity, firms’ age, competitiveness and industry effect. The research reveals that firm’s exposure to foreign exchange rate significantly increased as time horizon increases. Euro resulted to be most important exchange rate and more negatively exposed to foreign risk. As far as determinants have been concerned export ratio is positive and significantly related to foreign exposure and growth found to be least important in providing impact on foreign exchange rate exposure. The firm’s size showed mix and significant relationship with exposure.