Comparing Approaches to Measuring Foreign Exchange Exposure of Indian firms

Studies on measuring exposure suggest varied approaches and methods over the recent past. Estimating firm level exposure on the basis of capital market variables have been traditionally practiced as the Capital Market Approach (CM), along with the recent approach of considering transaction variables from company financials under the Cash Flow Approach (CF). This study measures the exchange rate exposure of the constituent firms of BSE S&P 500 index using both CM and CF approaches for a period of 17 years (2001-2017). The resulting exposure measures are compared across time and industrial sectors. The results indicate marked differences in the measured values from both approaches. Graphs and tabular analysis is used for discussion of the results.