Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach

How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of pr...

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Bibliographic Details
Published in:The Journal of finance (New York) 2007-10, Vol.62 (5), p.2475-2502
Main Authors: FRIBERG, RICHARD, GANSLANDT, MATTIAS
Format: Article
Language:English
Subjects:
Bottled water
Brands
Cash flow
Contrafactuals
Corporate finance
Cost analysis
Currency
Economic impact
Exchange rates
Financial management
Foreign exchange rates
Marginal costs
Market prices
Market share
Monte Carlo simulation
Product differentiation
Risk management
Studies
Transmission mechanism
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Summary:How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different brands face very different exchange rate risks.
ISSN:0022-1082
1540-6261
1540-6261
DOI:10.1111/j.1540-6261.2007.01281.x