Empirical Analysis of Long Horizon Foreign Exchange Exposure and Hedging Proxies on the Bombay Stock Exchange

This study analyzes the affect of fluctuations in the real effective exchange rates on a sample of companies listed on the Bombay Stock Exchange over a period of seven years. It studies whether the level of exports, imports and foreign currency hedging are responsible for affecting the stock returns of these companies. To for this purpose, the sensitivity of individual stock returns for a sample of companies are evaluated in relable to the movements in the exchange rate of the Rupee (Real Effective Exchange Rate) from April 2001 to March 2008.The determinant factors of the foreign exchange risk as well as the foreign currency proxies have been analyzed in an effort to evaluate their relevance and to determine how they affect the level of the exposure to foreign exchange risk. The results suggest that the stock returns of companies listed on the Bombay Stock Exchange have become sensitive to changes in exchange rate in both short as well as long run.