Effect of foreign exchange exposure on stock returns in ise

Department of Business Administration (English)Foreign exchange exposure is defined as the amounts of foreign currencieswhich represent the sensitivity of the real domestic currency (market) value ofassets, liabilities or operating incomes to unanticipated changes in exchange rates.An unanticipated change in exchange rates negatively affects the firm?s cash flows,its profitability and therefore its market value. The impact of exchange ratemovements on the firm profitability has important implications for making financialdecision about production, sales, pricing strategy, and financial operations. Asbusinesses become increasingly global, more and more firms find it necessary to paycareful attention to foreign exchange exposure and to design and implementappropriate hedging strategies to protect the firms from unanticipated changes inexchange rates.Previous studies in literature find weak evidence that support the significantrelationship between the changes in exchange rates and stock returns of exportingfirms. For understanding the effects of unanticipated changes in exchange rates onstock returns increases the importance of making an analysis at firm level.This study provides a literature survey on the concept of the exchange ratesensitivity of stock returns of exporting and non-exporting firms that are traded inIstanbul Stock Exchange. The aim of this study is to measure foreign exchangeexposure of Turkish firms whose stocks are traded in Istanbul Stock Exchange overthe period of January, 1999-September, 2005. Ordinary Least Square Regressionis used in the empirical analysis.The results of the thesis reveal mostly a negative and insignificantrelationship between the changes in exchange rates and stock returns. Furthermore,a change in exchange rates alone is insufficient to explain the variation in stockreturns in ISE.Key Words: 1) Foreign Exchange Exposure, 2) Stock Return, 3) Exchange Rate,4) Hedging, 5) Exporting Firms