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Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach
Author(s) -
FRIBERG RICHARD,
GANSLANDT MATTIAS
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01281.x
Subject(s) - counterfactual thinking , cash flow , econometrics , exchange rate , economics , product differentiation , monte carlo method , competition (biology) , product (mathematics) , cash , discrete choice , microeconomics , monetary economics , finance , mathematics , statistics , ecology , philosophy , geometry , epistemology , biology , cournot competition
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.