Published Online:July 2025
Product Name:The IUP Journal of Accounting Research & Audit Practices
Product Type:Article
Product Code:IJARAP100725
DOI:10.71329/IUPJARAP/2025.24.3.195-216
Author Name:M V S Kameshwar Rao
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:195-216
Estimating currency exposure has been a knotty issue in international finance literature. “Currency Exposure Puzzle”, as it is popularly referred to, is revisited in the year 2024. This paper summarizes 30 years of empirical efforts to unravel the currency exposure puzzle, focusing on equity return-based models. It discusses 15 different models, which made significant contributions to the relevant literature, along with their limitations. Considering the unanswered questions, and the residual nature of profits or cashflows to equity shareholders—after the various hedging efforts by firms—future research is evolving to consider cashflows and unhedged accounting metrics to resolve the puzzle. As of now, either the methods are not capturing its complexity, or the firms are hedging currency risk away. This is what at best can be concurred upon.
The commencement of floating rate era of exchange rates, since 1973, has added currency risk, as a significant risk to the existing bundle of risks facing the business enterprises, irrespective of their international orientation.