The effects of industry structure on economic exposure

A firm is subject to "economic exposure" if changes in exchange rates affect the firm's value, as measured by the present value of its future cash flows. This paper shows that in many forms of competition, including the most commonly studied case of monopoly, the economic exposure of an exporting firm is simply proportional to the firm's net revenues based in foreign currency. This simple result breaks down under some, but not all, forms of competition between the exporting firm and foreign firms. In that case, the exporting firm needs to know about the price elasticity of its product demand and its marginal cost in order to assess its exposure to exchange rates. The key determinant of economic exposure, therefore, is the competitive structure of the industry in which a firm operates. (C) 2001 Elsevier Science Ltd. All rights reserved.