Search results

The authors derive the probability distribution of the net present value of a project under the quite general assumption that the cash flows follow either an autoregressive moving average process or an integrated autoregressive process. Examples are presented which serve to both illustrate the application of the results as well as to underscore how to use utility functions for decision making, how to determine a project's Internal Rate of Return, and the dynamic resolution of uncertainty.

The purpose of this paper is to assess how much difference it makes for US firms to use the two‐factor ICAPM to estimate their cost of equity instead of a single‐factor CAPM.

For a large sample of US companies, the authors compare the empirical cost of equity estimates of a two‐factor international CAPM with those of the single‐factor domestic CAPM and the single‐factor global CAPM.

The authors find that the cost of equity estimates of the two‐factor ICAPM are reasonably close to those of either single‐factor model for US firms with low‐to‐moderate foreign exchange exposure; and second, perhaps surprisingly, for US firms with extreme foreign exchange exposure, that the cost of equity estimates of the two‐factor ICAPM tend to be very close to those of the domestic CAPM, and even closer than to those of the single‐factor global CAPM.

The paper's findings might prove useful to academic researchers wanting to resolve the seemingly contradictory empirical results on the pricing of FX risk.

The findings will hopefully help managers decide whether they should go to the trouble of estimating a US firm's cost of equity with the two‐factor international CAPM instead of a traditional single‐factor CAPM.

The paper extends the existing literature by focusing on the two‐factor ICAPM, and finds some new and surprising empirical results.

Reviews previous research based on event study methodology, pointing out that events can influence returns in many ways, and applies the method to a sample of mergers and acquisitions in the thinly traded Norwegian market 1983‐1994. Explains how the classic market model can be adjusted to control for non‐synchronous trading and changing/asymmetric volatility; and how the event and non‐event periods can be combined into a single model. Applies two different models to the data, compares the results and finds the ARMA‐GARCH approach superior to the OLS. Discusses the implications of this for researchers.

The purpose of this paper is to present scenarios of interactive trilateral foreign exchange (FX) exposure, where a company’s exposures to two foreign currencies depend on those currencies’ FX rate with each other.

A pro forma analysis of three-way FX rate changes illustrates interactive trilateral FX exposure and generates observations for a multivariate regression estimation of FX exposure coefficients.

The multivariate regression estimates of FX exposure provide the basis for a useful financial hedging strategy for interactive trilateral FX exposure. Some of the FX exposure estimates have surprising signs and magnitudes.

Scenario analysis does not result in a general theory of interactive FX exposure, but the study’s diverse and rich scenarios may provide helpful insights to theoretical and empirical researchers.

The scenarios relate to many common real-world situations and thus may help managers and educators better understand how to manage FX exposure.

The topic of interactive FX exposure is under-researched and under-covered in contemporary textbooks or the applied finance literature.