EXCHANGE RATE VOLATILITY EXPOSURE ON CORPORATE CASH FLOWS AND STOCK PRICES: THE CASE OF CZECH REPUBLIC

Czech Republic is small open economy with eurozone countries as one of the most important trade partners, meaning a large number of transaction settlement is conducted in euro. The financial market is rather less liquid, which means that firms have limited access to currency derivatives. As a consequence, it can be expected that firms are more exposed to exchange rate risk which may affect the expected cash flows and thus the firm value as well. The paper aims to examine the exchange rate exposure of firms operating in Czech Republic on the basis of stock prices and corporate cash flows and presents results of the level of exchange rate exposure of a sample of publicly listed companies and more than 7,000 large, medium sized and small firms of 8 different industries from 2003 - 2012, resp. 2014 using panel regression and orthogonalized exposure regressions and market model. Results show that significant percentages of publicly listed firms and some small and medium sized groups of firms are exposed, thus the exchange rate risk measuring and hedging is crucial for reduction of the firms' uncertainty.