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Extreme exchange rate shocks defeat traditional means of corporate protection

Hedging and pass-through techniques are proving insufficient to protect against extreme losses.

A study published in The Review of Corporate Finance Studies uses the sudden appreciation of the Swiss Franc by 15% in 1 day to examine the extent to which companies can protect themselves from the risk of extreme currency losses. It finds that large and extreme currency events have substantial negative implications for firms’ equity valuations, profitability, and investment. The article is co-authored by Matthias Efing (HEC Paris), Rüdiger Fahlenbrach (Ecole Polytechnique Fédérale de Lausanne), Christoph Herpfer (Emory University), and GSEM Professor Philipp Krüger. The study received funding from the Swiss Finance Institute.



Past research has suggested that firms can significantly reduce their exposure to moderate exchange rate fluctuations by means of pass-through and hedging. Studying the appreciation of the Swiss franc by 17% on January 15, 2015, we show that firms remain exposed to extreme currency events. Pass-through, a way to share the costs of exchange rate risk with foreign customers, fails after extreme exchange rate shocks, particularly in competitive industries. Firms’ exposure to currency tail risk has real consequences for their investment. The decrease in investment is explained by a reduction in profitable investment opportunities and not by financial constraints.

Access the study: How Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?

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October 19, 2022
  Top publications
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