Article ID: | iaor20091190 |
Country: | United Kingdom |
Volume: | 62 |
Issue: | 5 |
Start Page Number: | 2475 |
End Page Number: | 2502 |
Publication Date: | Oct 2007 |
Journal: | Journal of Finance |
Authors: | Friberg Richard, Ganslandt Mattias |
Keywords: | simulation: applications, financial, agriculture & food |
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.