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Int. Fin. Markets, Inst. and Money 15 (2005) 125–140
A note on common methods used to estimate foreign
Anna D. Martina,∗ , Laurence J. Mauerb,1
Department of Finance, Dolan School of Business, Fairﬁeld University, Fairﬁeld, CT 06824, USA
b Department of Economics and Finance, Tobin College of Business, St. John’s University,
Jamaica, NY 11439, USA
Received 17 May 2003; accepted 15 March 2004
Understanding the impact of foreign exchange risk is a critical element for purposes of ﬁrm valuation and risk management. In this study, we review the beneﬁts of capital market and cash ﬂow
foreign exchange exposure estimation methods, and using a sample of large U.S. banks, we conduct a
comparison of the frequency with which each method detects exposure. We ﬁnd some evidence of the
relative strength of the capital market-based method in expectations formation, since about 25% of
the sample that does not show signiﬁcant cash ﬂow sensitivity to the pound has signiﬁcant stock price
sensitivity. We also ﬁnd evidence of the relative strength of cash ﬂows to detect exposure. Across all
ﬁve currencies examined, when cash ﬂows have exposure, the capital market regularly (70–100% of
the time) does not ﬁnd the exposure to be signiﬁcant.
© 2004 Elsevier B.V. All rights reserved.
JEL classiﬁcation: F31; C13
Keywords: Exchange rate exposure; Methods
Corresponding author. Tel.: +1 203 254 4000x2881; fax: +1 203 254 4105.
E-mail addresses: firstname.lastname@example.orgﬁeld.edu (A.D. Martin), email@example.com (L.J. Mauer).
Tel.: +1 718 990 6419; fax: +1 718 990 1868.
1042-4431/$ – see front matter © 2004 Elsevier B.V. All rights reserved.
A.D. Martin, L.J. Mauer / Int. Fin. Markets, Inst. and Money 15 (2005) 125–140
Since exchange rate risk can affect cash ﬂows and stock prices of ﬁrms, the exposure to
this risk is a key concern for investors, analysts, and managers....
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