Pass-through and Exposure The Journal of Finance
Vol. LVII, No. 1, 2002
Gordon M. Bodnar
Johns Hopkins University
Bernard Dumas
Insead
and Richard C. Marston
University of Pennsylvania Abstract Firms differ in the extent to which they “pass-through” changes in exchange rates into foreign currency prices and in their “exposure” to exchange rates--the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm’s pass-through and exposure should be related. This paper develops models of exporting firms under imperfect competition to study these related phenomena. From these models we derive the optimal pass-through decisions and the resulting exchange rate exposure. The models are estimated on eight Japanese export industries using both the price data pass-through and financial data for exposure.
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