Interest rate and exchange rate impact on U.K. firms

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The purpose of this paper is to apply the Dual-Effect hypothesis in Pritmani, Shome and Singal paper (2003), in order to analyze the exchange rate exposure on firms listed on the U.K. market. The study will examine if the foreign involvement of the firm will affect the share price of the firm. In addition to evaluating the Dual-Effect hypothesis in Pritmani et. al. (2003), we will evaluate the effect of foreign interest rates impact on U.K. firms. By evaluating the interest rate exposure this study will try to test the second variable proposed by Oxelheims and Wihlborgs MUST-analysis. The most significant results were found in the exporting and domestic firm portfolios. For importing and MNCs, this thesis found only sporadic significance. The results for MNCs and exporting firms are, in general, in line with earlier research within this field. The significant results for the domestic firms are interesting in the way that conventional wisdom states that domestic firms should not be exposed towards foreign macroeconomic factors. This study showed that in fact they are exposed to the macro economic variables indirectly through competition from abroad. In addition to adding some new knowledge regarding exchange rate expos...