A Literature Review on the Quantification of Foreign Exchange Exposure of Non-Financial Firms Using Capital Market Approach

Since the transitions from fixed to floating exchange rates after the breakdown of the Bretton Woods system in 1973, companies have become increasingly exposed to foreign exchange rate risk. The importance of foreign exchange risk has long been emphasized in the financial risk management literature. This study is a literature review focusing on the foreign exchange rate exposure that is the impact of foreign exchange risk on companies’ assets and liabilities. Firstly, the study tried to clarify the concept of the foreign exchange exposure and then the different models in the context of capital markets approach on the measurement of the foreign exchange rate exposure was examined in detail. Secondly, determinants of foreign exchange exposure were overviewed in general. Thirdly, the relationship between foreign exchange risk management and foreign exchange exposure is summarized. The research was made to cover the basic theoretical and empirical studies in this area. We examine the empirical literature on advanced and developing economies in particular. This paper provides a comparative outlook to researchers, who are interested in related subjects in financial risk management.