| Summary: | In today's world of volatile currencies and increasing levels of cross-border trade, few companies, if any, are unaffected by movements in foreign exchange rates. This thesis investigates the impact of currency fluctuations on UK non-financial companies. In particular it focuses on their economic exposure, or the impact of unexpected changes in foreign exchange rats on the future cash flows of the firm. The empirical research presented in this thesis is based on two postal surveys that were distributed to the finance directors of listed UK non-financial companies (in 1996 and 1997) and also interviews conducted with some of the survey respondents. The aim of the research is to discover the direction, magnitude, and causes of the economic exposure faced by UK firms. This thesis takes as its primary focus the investigation of the indirect, or competitive determinants of economic exposure, in addition to the direct exposures arising from the volume of a company's cross-border trade. The study also reports on the extent to which the sample companies are able to make adjustments to their operating policies such as production location, input sourcing and pricing in order to reduce the sensitivity of their cash flows to foreign exchange rate movements. The principal conclusion of this thesis is that the cash flows of UK companies are less sensitive to changes in foreign exchange rates than the economic exposure theory would suggest. There are two explanations for this finding. The first is that many companies have achieved a natural hedge from currency fluctuations by purchasing a high proportion of their inputs in the foreign currencies they receive for their export sales. A second explanation is that some of the surveyed finance directors may not be aware of the full impact of foreign exchange rates on the competitive position of their companies. The survey evidence also suggests that the direct sources of economic exposure such as the extent to which a company sells in foreign markets are more significant than the indirect sources such as the geographical location of a company's competitors.
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