Abstract

The failure of most previous research to support the widely held view of the pricing of foreign exchange rate exposure can be attributed to inadequate model specification. In this thesis, we adopt both the constant and time-varying model to gauge the extent of the foreign exchange rate pricing among Canadian multinationals. By using monthly stock returns for the 1996-2002 period, we find that Canadian mining firms benefit when the Canadian dollar appreciates against the U.S. dollar. This is contrary to the widely accepted theory that major exporting firms should benefit from the depreciating domestic currency. In addition, we do not find sufficient evidence that mispricing contributes to failures in previous empirical research to find a significant relationship between firm value and exchange rate movements. Based on the time-varying model, we find that firms with larger proportions of foreign sales relative to total sales are more vulnerable to changes in the bilateral exchange rate while firms with larger foreign production are more negatively affected when the Canadian dollar depreciates. The use of a cross-listing dummy variable indicates that U.S. investors are willing to pay more for Canadian stocks given the positive benefits expected from a depreciating Canadian dollar.