Question Details

How can a U.S. company use regression analysis to assess its economic exposure 



1. Comparing Transaction and Economic Exposure. Erie Co. has most of its business in the U.S.,
except that it exports to Belgium. Its exports were invoiced in euros (Belgium- currency) last
year. It has no other economic exposure to exchange rate risk. Its main competition when selling
to Belgium- customers is a company in Belgium that sells similar products, denominated in euros.
Starting today, Erie Co. plans to adjust its pricing strategy to invoice its exports in U.S. dollars
instead of euros. Based on the new strategy, will Erie Co. be subject to economic exposure to
exchange rate risk in the future? Briefly explain.

2. Using Regression Analysis to Measure Exposure.
a. How can a U.S. company use regression analysis to assess its economic exposure to
fluctuations in the British pound?

b. In using regression analysis to assess the sensitivity of cash flows to exchange rate
movements, what is the purpose of breaking the database into sub periods?

c. Assume the regression coefficient based on assessing economic exposure was much higher in
the second sub period than in the first sub period. What does this tell you about the firm-
degree of economic exposure over time? Why might such results occur?




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