Exchange rate exposure and its determinants in Finland

Abstract

Based on a firm-level analysis, this paper explored whether unexpected changes in exchange rates volatilized Finnish businesses’ stock returns, and if exposure to these rates was driven by firm-specific characteristics. The study proved that exchange rate fluctuation affects company value, through a sampling of 128 Finnish firms in the Helsinki OMX stock exchange, featured in the STOXX EUROPE 600 index as a mar- ket stand-in and EURO NOMINAL EER42 EFFECT to represent the FX rate throughout the test period between December 2016 and December 2020. The data was analysed through multivariate OLS regression, descriptive statistics, and correlation analyses. The stock returns of Finnish firms were generally correlated with unexpected exchange rate changes, and in excess of 60% of Finnish companies with major exposure to exchange rates’ fluctuating benefitted from a weakened euro. Furthermore, when the determining factors of exchange rate risk for any given firm were examined, it is discovered that leverage and price to book value are both negatively related to exchange rate risk, implying firms with higher leverage and price to book value are additionally predisposed to hedging in order to limit exposure to exchange rates. Quick ratio as well as foreign asset ratio both are positively insignificant compared with foreign currency risk; firms' size and foreign sales ratio are, inversely related to foreign currency risk, possibly attributable to initial data selection.