Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach




    Search for more papers by this author
    • Richard Friberg is at Stockholm School of Economics and CEPR. Mattias Ganslandt is at Research Institute of Industrial Economics. We thank Joel Reneby, Fredrik Wilander, an anonymous referee, and seminar participants at Stockholm University, Uppsala University, and the Finance workshop at Stockholm School of Economics for valuable comments.


How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different brands face very different exchange rate risks.