Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 6: Adjusting Stock Market Values to Exchange Rate Exposure: The Case of ASTRA, SCA and STORA.

Lars Rolseth
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Lars Rolseth: Unitfond, Postal: Sundstorget 5, 252 21 Helsingborg

Abstract: Europe's two largest forest product companies SCA and STORA are located in Sweden. One of the largest firms in Sweden is ASTRA, which is a pharmaceutical company. In this paper I analyze how the variance of these firms' values and their stock returns sensitivity to exchange rates and interest rates are affected by different hedging strategies. First are new share price series constructed there gains and losses due to not undertake any hedging practices for transaction and translation exposure are realized. There after are the exposure coefficients obtained from the adjusted share price compared to the exposure coefficients obtained using the firms core share price as a dependent variable. The results show that SCA and STORA manage to reduce the exchange rate exposure significantly, but that both SCA and STORA´s stock return are still sensitive to contemporaneous changes in exchange rates. The linear multiple regression method was unable to detect any significant exchange rate exposure for ASTRA. However, the hedging of translation and transaction exposure do not necessarily imply that the variance of the firm's value is reduced.

Keywords: Transaction exposure; Translation exposure; Hedging strategies

JEL-codes: G12; G32

24 pages, October 7, 1998

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