Exchange rates and cash flows in differentiated product industries: a simulation approach

Exchange rates and cash flows in differentiated product industries: a simulation approach

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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: ,
Keywords: simulation: applications, financial, agriculture & food
Abstract:

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.

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