Bulletin – June Quarter 2016 Currency Risk at Emerging Market Firms Abstract

Exchange rate fluctuations can affect the value of emerging market (EM) firms in several ways, including through trade-related and balance sheet channels. This article examines the effects of exchange rate fluctuations on listed EM firms' share prices. Overall, a depreciation of the exchange rate is estimated to lower the share prices of around 25 per cent of EM firms, while 15 per cent of firms benefit and the share prices of the remaining 60 per cent are unaffected by a lower exchange rate. Among firms with share prices that are sensitive to exchange rate fluctuations, those that are more indebted tend to be more adversely affected by depreciation. However, there is no significant association between the sensitivity of a firm's share price to exchange rate fluctuations and the size of that firm's foreign currency-denominated debts, consistent with the prevalence of natural hedging among EM firms with such debt.