This study examines the economic exchange rate exposure of 22 industries in Pakistan. The key findings of the study are: firstly, the findings show that industry-level share values are statistically significantly influenced by changes in the Pakistani Rupee (PKR)/US-dollar exchange rate, in general. Secondly, a statistically significant lagged response of stock values to exchange rate change is reported. Finally, the highly capital-intensive industries are, however, found to be more exposed to changes in exchange rate in comparison to the less capital-intensive industries. Further, the robustness of the exchange rate exposure does not fall over time.

The role of foreign exchange rate in economic development has always remained debatable and controversial in the development literature. With the passage of time, the importance of exchange rate has been increasing due to the financial reforms and trade liberalization alike. Fluctuations in exchange rates are of great concern to households, policy makers and business firms. In the 1990s, the markets for goods and finance became global. When business firms in one country want to trade, borrow, or lend in another country, they have to conduct their transactions in different currencies. Therefore, it is widely believed that the abrupt exchange rate movements have a significant impact on business firms' economic decisions. Particularly, those firms that are engaged in international trade are quite sensitive to exchange rate fluctuations.

The rapid expansion in international trade and adoption of floating exchange rate regimes by money economies have led to increased foreign exchange rate volatility. Greater exchange rate fluctuations (uncertainty) may increase the value of waiting and hence affect the competitiveness of firms engaged in international competition. On the other hand, less volatility of exchange rate has a positive impact on economic activities and makes domestic industries relatively less competitive. That is why, the knowledge about firms' exchange rate exposure is of great interest to investors seeking to hedge their portfolio and to corporate managers making management decisions.

As mentioned by the existing body of theoretical literature, there are three types of exchange rate exposure under floating exchange rate regime, viz., translation exposure, transaction exposure and economic exchange rate exposure. Translation and transaction exposures are accounting-based and defined in terms of book values of assets and liabilities denominated in foreign currency. However, economic exchange rate exposure is the sensitivity of firm value to changes in exchange rates. A firm is said to exhibit exchange rate exposure if its share value is affected by exchange rate volatility (see, for details Adler and Dumas, 1984).

Monetary Economics Journal, Economic Exchange Rate Exposure, Small Open Economy, Development Literature, Economic Decisions, Business Firms, Financial Reforms, Management Decisions, Economic Development, Financial Markets, Product Markets, Domestic Market Model.