THE EXCHANGE RATE RISK IN THE JOHANNESBURG STOCK MARKET: AN APPLICATION OF THE ARBITRAGE PRICING MODEL

The volatility of exchange rates has caused much concern among policy makers in government, the business community, financial institutions and financial markets as it contributes to international risks. Investors are also concerned about the impact of the exchange rates' movements on both the c...

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Bibliographic Details
Published in:Journal of global business and technology 2012-04, Vol.8 (1), p.60
Main Authors: Muzindutsi, Paul-Francois, Niyimbanira, Ferdinand
Format: Article
Language:English
Subjects:
American dollar
Arbitrage
Cash flow forecasting
Currency
Discount rates
Efficient markets
Floating exchange rates
Foreign exchange markets
Foreign exchange rate risk
Foreign exchange rates
Foreign investment
Portfolio management
Pricing policies
Risk exposure
Risk premiums
Securities markets
Stock exchanges
Studies
Volatility
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Summary:The volatility of exchange rates has caused much concern among policy makers in government, the business community, financial institutions and financial markets as it contributes to international risks. Investors are also concerned about the impact of the exchange rates' movements on both the cash flow of companies' operations and the discount rate employed to value these cash flows. This paper inspects the pricing of exchange rate risk in the South African stock market, using a two-factor arbitrage pricing model. After examining the Johannesburg Stock exchange All Share Index Top40 (ALSI Top40) companies, the conclusion is reached that these companies tend to be negatively exposed to the exchange rate risk. The unconditional premium attached to the foreign exchange rate exposure is found to be 2.2% per month and is both economically and statistically significant. The exchange rate does not appear to be diversifiable (systematic risk) and active hedging policies by financial managers can affect the cost of capital. Investors should, therefore, earn a premium by being exposed to the foreign exchange rate risk. [PUBLICATION ABSTRACT]
ISSN:1553-5495
2616-2733