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Federal Reserve Bank of San Francisco
Pacific Basin Working Paper Series
The exchange rate exposure of U.S. and Japanese banking institutions
Sandra Chamberlain
John S. Howe
Helen Popper
Abstract

In this paper, we examine the foreign exchange exposure of a sample of U.S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of a sample of Japanese banks. We find that the stock returns of a significant fraction of the U.S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U.S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.


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Sandra Chamberlain & John S. Howe & Helen Popper, The exchange rate exposure of U.S. and Japanese banking institutions, Federal Reserve Bank of San Francisco, Pacific Basin Working Paper Series 95-11, 1995.
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Keywords: Banks and banking - Japan ; Japan ; Foreign exchange rates ; Risk ; Bank holding companies
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