Exchange rates impact both macroeconomic and microeconomic levels. At the macro level, currency depreciation can improve a country's trade balance and increase exports, GDP, and employment in exporting industries. At the micro level, exchange rate movements affect exporting firms' revenues, costs, profits and valuation. Empirical analysis of Portuguese export data shows the exchange rate with the UK, US and Angola significantly impact export levels to those countries. Firms can mitigate currency risk through hedging strategies, diversifying markets, and matching cash flows.

1. THE IMPACT OF EXCHANGE RATES
ON EXPORT BUSINESS
FILIPE FERREIRA DA COSTA | GIL LOUREIRO | NUNO FERREIRA | PATRÍCIA BOAVIDA

2. Agenda
What is exchange rate
How does it impact on economy (macro level)?
How does it impact on export business (micro level)?

3. What exactly is
exchange rate?
 Is the rate at which two currencies are exchanged;
 Reflects the demand and supply of one currency
relative to the demand and supply of another;
 The demand and supply of currencies is fueled by
the demand and supply of goods and services
and capital.

4. Key factors influencing
exchange rates
Inflation
Countries with consistently high inflation
tend to have a lower currency value as its
purchasing power decreases relative to other
currencies.
Interest rates
Lower interest rates compared with other countries
discourage investors which causes a country´s currency to
depreciate.
Trade Balance
Countries with a deficit in balance of trade
tend to see their currencies depreciate as
demand for their currency decreases.
Public Debt
Countries with high level of public debt are less
attractive to foreign investors, due to fears of high
inflation and the chance of defaulting. This will
decrease the currency´s value.
Political Stability &
Performance
Political or economical risk in one country
might encourage investors to invest in a
more stable country.
Government intervention
Central banks influence exchange rates by buying or selling the
domestic currency to stabilize it.

5. THE IMPACT OF EXCHANGE RATES
ON ECONOMY

6. Economic effects of
currency depreciation
Devaluation of
domestic currency
Effects on Imports
Imports of intermediate
inputs Prices RISE
Import Prices RISE
(finished goods | services)
Production costs RISE
Effects on Exports
Export Prices FALL
INCREASE in Exports
GDP
Employment
Exporting
Industries Profits
and Incomes
Domestic Prices
(imported goods and
services, consumption
composition will change)
Net Exports
INCREASE
Aggregate
Demand
INCREASE
Y=C+I+G+(X-M)
1Assuming that the export stimulus effect and the
volume effect on imports together outweigh the
import-cost effect
Inflation
Impact in key
economic indicators1
DECREASE in
Imports

7.  Foreign demand or domestic supply
of export goods is inelastic
 Global economy in recession
 Business activities located in domestic market
 Higher costs passed on to customers to maintain margin
Low Effect
 Foreign demand or domestic supply
of export goods is elastic
 Substantial demand from overseas visitors
 Business overseas operations and investment
 Higher costs to be absorbed via lower margin
High Effect
The effect of a depreciation
depends on:

8. THE IMPACT OF EXCHANGE RATES
AT COMPANY LEVEL

9. The PortugueseTrade Account
Exportsforgoodsand services (2015)
USA 5%
Brazil 2%
Spain
21%
France 13%
Others 26%
UK 9%
China 1%
Angola 5%
Italy 3%
Netherlands 4%
Germany 11%
+189%
(1996-2015)

10. PT Exports vs.
Exchange Rates
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
2000
4500
7000
9500
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
EXPORTS (M€) FX (€/£)
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1000
2000
3000
4000
5000
1996199820002002200420062008201020122014
EXPORTS (M€) FX (€/$)
0
20
40
60
80
100
120
140
160
0
1000
2000
3000
4000
5000
1996199820002002200420062008201020122014
EXPORTS (M€) FX (€/AOA)
€ appreciation
(more € for £)
Financial crises hits
Bank of England
cuts interest rates
9/11
Financial
crises hits
Unemployment
rate peaks
End of civil war
Oil prices fall
Reduction in oil
production and
Pub.+Priv.
consumption
Angola economic
crisis

11. UK US AO
Regression Model - the impact
of FX in PT exports
exportsstandarddeviations
FX Population Gov. Revenue Gov. Expenditure
UK US AOA
Example PT to UK: a 0,09 decrease in € (or increase in £) results in a 0,54 standard
deviation increase in Exports, in value +483 € Millions (0,54x892)

12. Model versus Real
Exports (PT) = -11244,6 -919,8 FX (€/$) +51,05 Population +0,74 Gov. Revenue -0,72 Gov. Expenditure
Illustrative Example – The Navigator Company: Impact of €/$ in exports to the U.S.
Model
1,327
3.586,95
Exports 2014
(€ millions)
186,81
3.782,21
Exports 2015
(€ millions)
200,231
% (var.)
+5,4%
+6,7%
1,112
€/$ 2014 €/$ 2015

13. Impact of FX on EBITDA
(sensitivity analysis)
-12% -8% -4% 0% 4% 8%
% of EBITDA
+7,1% (+6,3 M€)
-8,6% (-7,7 M€)
+9,0% (+7,4 M€)
-11,0% (-9,1 M€)
+1,8% (+7,2 M€)
-2,2% (-8,8 M€)
-2,3% (-7,5 M€)
+1,6% (+5,2 M€)
2015
2014
2015
2014
FX change
+10%-10%

14. Translation Exposure
Changes in reported owners' equity in
consolidated financial statements
caused by change in exchange rates
Operating Exposure
Change in expected future cash flows arising
from an unexpected change in exchange rates
Transaction Exposure
Impact of settling outstanding obligations entered into before
change in exchange rates but to be settled after change in
exchange rates (impact on cash flow)
Changes in exchange rate can affect firm value through:
Types of Currency
Exposure
Moment in time when
exchange rate changes

15. Risk Mitigation
 Diversify markets and/or
production sites
 Sourcing / Purchasing
Flexibility
OPERATIONAL TOOLS
 Currency risk-sharing
agreements
 Usage of derivatives: swaps
and forwards - hedging
policies
SHORT TERM TOOLS
 Match cash flows: natural
hedge
 Intercompany back to back
loans
 Financing: Diversification of
markets and currencies
LONG TERM TOOLS

16. In sum…
 Several factors influence exchange rates, some related with demand and supply of goods
and services and some with capital/investment
 Also, when there is a depreciation, the exports of a country will be cheaper and imports
more expensive. This may improve trade balance and therefore lead to economic growth
 Evidence based on a model shows that exporting firms are vulnerable to exchange rate
movements. Nevertheless, there are other variables that impact the outcome
 There are different types of currency exposure and the associated business risks are a fact
of life for multinational firms

17. APPENDIX

18. Exchange Rates and Net
Exports
• If export products are predominantly priced and
invoiced in domestic currency, and imports are
predominantly priced and invoiced in foreign currency, a
sudden devaluation of the domestic currency can
possibly result – initially – in a deterioration of the
balance on trade (x-y). After exchange rate changes are
passed-through to product prices, and markets have
time to respond to price changes by altering market
demands, the trade balance will improve (y-z). The
currency contract period may last from three to six
months, with pass-through and quality adjustment
following for an additional three to six months.

19. Currency impact on European
Corporate Earnings
Fireapps quarterly study on how currency affects corporations. The companies included in this data set are large
multinational firms with at least 15% international revenues in at least two currencies.

20. Goods & Services
Demand
Currencies
Gov. Expenditure
Population
Economic Growth
Gov. Revenue
Exports
FX
Variable to Explain:
Exports - consolidated Goods and Services exports from Portugal to country ‘x’ in € million.
Independent variables:
FX – nominal exchange rate of €/x
Gov. Expenditure - consists of total government expense and the net acquisition of nonfinancial assets, in Billions national currency.
Population - comprise either all usual residents of the country or all persons present in the country at the time of the census, in Millions persons.
Gov. Revenue - consists of taxes, social contributions, grants receivable, and other revenue, in Billions national currency
Regression model – variables that
explain PT exports

21. Standard Deviations Standardized Coefficients
Variables UK US AO UK US AO
FX 0.09 0.17 53.80 -0.54 -0.26 -0.13
Population (Per. M) 2.25 16.15 3.36 0.75 1.39 0.26
Gov. Revenue (€B) 117.26 774.12 1,876.42 1.02 0.97 0.04
Gov. Expenditure (€B) 161.12 1,157.24 1,881.47 -0.64 -1.41 0.82
Exports from PT (€M) 892 594 1,512
Example: a 0.09 increase in FX(€/£) results in a 0.54 standard deviation decrease in Exports
from PT to the UK, in value -483 € Millions (0.54x892)
0.00
0.00 Variable with more than 90% of probability of being correct that it have
some effect;
Variable with less than 90% of probability of being correct that it have
some effect;
Regression model – standardized
coefficients

22. Regression model – outputs for US
SUMMARY RESULTS
Regression statistics
R multiple 0.99
R square 0.97
Adjusted R square 0.96
Standard error 113.24
n 20.00
Exports Standar Deviation 594.21
ANOVA
GL SQ MQ (F)
F of
significance
Regression 4.00 6,516,390.46 1,629,097.61 127.05 0.00
Residual 15.00 192,339.68 12,822.65
Total 19.00 6,708,730.13
Coefficients Standard error Stat t P value
95% lower
than
95% higher
than
Less than
95.0%
More than
95.0% Standard Deviation Standardized Coefs
Intercept -11,244.60 1,701.82 -6.61 0.000 -14,871.95 -7,617.25 -14,871.95 -7,617.25
FX (€/$) -919.84 249.30 -3.69 0.002 -1,451.22 -388.46 -1,451.22 -388.46 0.17 -0.26
Population (Millions Per.) 51.06 6.94 7.36 0.000 36.27 65.84 36.27 65.84 16.15 1.39
General government revenue (Billions) 0.74 0.08 9.02 0.000 0.57 0.92 0.57 0.92 774.12 0.97
General Government Expenditure (Billions) -0.72 0.11 -6.62 0.000 -0.96 -0.49 -0.96 -0.49 1,157.24 -1.41
• Very high value of R Square
• All independent variables are significant with a confidence
interval of 95%

23. Regression model – outputs for UK
• Very high value of R Square
• Independent variable “Gov. Expenditure” not significant
with a confidence interval of 95%
SUMMARY RESULTS
Regression statistics
R multiple 0.98
R square 0.95
Adjusted R square 0.94
Standard error 217.55
n 20.00
Exports Standar Deviation 892.17
ANOVA
GL SQ MQ (F)
F of
significance
Regression 4.00 14,413,337.55 3,603,334.39 76.14 0.00
Residual 15.00 709,918.79 47,327.92
Total 19.00 15,123,256.34
Coefficients Standard error Stat t P value
95% lower
than
95% higher
than
Less than
95.0%
More than
95.0% Standard Deviation Standardized Coefs
Intercept -11,049.90 4,742.37 -2.33 0.034 -21,158.03 -941.78 -21,158.03 -941.78
FX (€/£) -5,284.60 1,326.69 -3.98 0.001 -8,112.37 -2,456.82 -8,112.37 -2,456.82 0.09 -0.54
Population (Millions Per.) 295.90 94.67 3.13 0.007 94.11 497.68 94.11 497.68 2.25 0.75
General government revenue (Billions) 7.76 3.91 1.99 0.066 -0.56 16.09 -0.56 16.09 117.26 1.02
General Government Expenditure (Billions) -3.57 2.82 -1.26 0.225 -9.58 2.44 -9.58 2.44 161.12 -0.64

24. Regression model – outputs for AO
• Very high value of R Square
• Independent variable “Gov. Revenue” and “FX” not
significant with a confidence interval of 95%
SUMMARY RESULTS
Regression statistics
R multiple 0.99538792
R square 0.990797111
Adjusted R square 0.988343008
Standard error 163.2353932
n 20
Exports Standar Deviation 1511.893068
ANOVA
GL SQ MQ (F) F of significance
Regression 4 43030905.4 10757726.35 403.7308 4.52178E-15
Residual 15 399686.9037 26645.79358
Total 19 43430592.31
Coefficients
Standard
error Stat t P value 95% lower than
95% higher
than
Less than
95.0%
More
than
95.0% Standard Deviation Standardized Coefs
Intercept -1,245.93 831.81 -1.50 0.155 -3,018.90 527.04 -3,018.90 527.04
FX (€/AOA) -3.52 2.03 -1.73 0.103 -7.85 0.81 -7.85 0.81 53.80 -0.13
Population (Millions Per.) 116.24 54.73 2.12 0.051 -0.41 232.89 -0.41 232.89 3.36 0.26
General government revenue (Billions) 0.03 0.11 0.26 0.795 -0.21 0.27 -0.21 0.27 1,876.42 0.04
General Government Expenditure (Billions) 0.66 0.14 4.72 0.000 0.36 0.95 0.36 0.95 1,881.47 0.82

25. Sources:
• www.pordata.pt
• stats.oecd.org/
• www.ine.pt
• www.economicshelp.org/macroeconomics/exchangerate/effects-devaluation/
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