Based on dynamic nature of foreign exchange rate risk toward Malaysian firms across different time horizons, this paper is motivated to investigate the multiscale effect of currency exposure using wavelet analysis for 71 industrial products and services firms listed on the main market of Bursa Malaysia. The study employed Daubechies Least Asymmetric as a special wavelet filter in Maximal Overlap Discrete Wavelet Transform (MODWT) method to decompose a given time series into different time-intervals from January 2000 till December 2020. Specifically, the study found that there was non-monotonic exchange risk concentration from low to high time scale. As a result, as time horizon widened, the firm profitability becomes more sensitive to the foreign currency fluctuations. Besides, majority of the sample firms were negatively exposed to the Euro (EUR), and Japanese Yen (JPY) indicating that Malaysia industrial firms were benefited from depreciation of these currencies. Given the significant time scale effect of currency exposure, firm managers and investors should incorporate the length of transactions in foreign exchange risk assessment for greater accuracy and timely decision making in hedging strategies.

After the abolishment of fixed exchange regime under the Bretton Woods System in 1970s, the issue of foreign exchange risk expecially among multinational corporations operating under small and open economies of Malaysia remains relevant till today. According to Abdul Wahab et al. (2017) and Adler and Dumas (1984), exchange rate exposure refers to the extent of firm's sensitivity to exchange rate fluctuations. While there has been growing interest in examining foreign exchange risk incidence under Malaysia market, however limited studies have been focusing on single sector of consumer products and services in Malaysia. Under Bursa Malaysia, the sector consists of several sub-fields including agricultural products, automotive, food and beverages, household goods, personal goods, retailers and travel and leisure services. Given the wide range of products and services, the corporations under the sector have been involved in vigorous cross-border trading activities. The consumer products and services equities become the second largest sector in Bursa Malaysia which constitues 15.89% of total stocks in main market of Bursa Malaysia in July 2021 with a 265.02 billion of total market capitalization. In terms of methodological issue, the study addresses on the bias in exchange risk pricing in previous studies. Specifically, majority of past studies assume homogeneity of exchange risk across time domains which seems to be unrealistic. Capital market contains wide range of participants with heterogenous investment holdings and expectations. To address time domain bias, the study adopts Maximal Overlap Discrete Wavelet Transformation (MODWT) in foreign exchange risk pricing to decompose a single time domain series into multiple time domains. Given this, the primary objective of the study is to examine the extent of multi-horizon foreign exchange exposure of consumer products and services sector in Malaysia from January 2000 till December 2020. Keywords: Currency Exposure, Wavalet Technique, MODWT, Malaysian Consumer Sector

This study examines the extent and nature of foreign exchange exposure in 405 listed corporations operating in the ASEAN-4 nations, Indonesia, Malaysia, Singapore, and Thailand. The study period of 23 years, from 1995 to 2017, covers the two major crisis periods, the Asian financial crisis (AFC) of 1997 and the global financial crisis (GFC) of 2008. Our study improves on earlier work by using two alternative assessment methods, i.e., stock returns (SR) and cash flow (CF) methods. We report several interesting and noteworthy results. First, we find that the stock returns approach results in a higher incidence of exchange rate exposure relative to the cash flow method. Specifically, about 65% and 28% of the total ASEAN-4 firms had significant exposure to all currencies under the stock returns and cash flow methods, respectively. Second, we find the sample firms to have predominant exposure to the US dollar, signifying the important role played by the United States (US) as the major trading partner of the ASEAN-4. Third, when evaluating time-varying exposure, we find that the incidence of the exchange rate exposure is event-specific. Most of our sample firms were highly exposed to exchange rates during the mid-points of the AFC and the GFC.

Objective – Past efforts in assessing foreign exchange rate exposure assume homogeneity in the level of exposure across time horizons which seems to be impractical due to the dynamic nature of comovement between firm value and exchange rate. Methodology – Given this, the study aimed to investigate the multi-scale relationships between changes in exchange rates and firm values of 56 multinational corporations in the consumer products and services sector from January 2000 to December 2020. Findings – The novelty of the study lies upon the application of Maximal Overlap Discrete Wavelet Transformation (MODWT) method which allows decomposition of a single time series domain into different time domains. The fragmentation into multiple time domains allows the measurement of scale-dependent foreign exchange exposure. As a result, the study discovered a non-monotonic trend for wavelet scale j of currency exposure across time scales. In particular, there was a gradual increase in the magnitude of beta exchange exposure and the proportion of exposed firms from low to high time scales. This finding suggested that firm value is more sensitive to changes in the exchange rate within a widened time domain. Novelty – The study demonstrated on how the wavelet technique can be used to measure foreign exchange risk and aided firm managers and market participants in managing foreign exchange risk for a specific time interval. Type of Paper: Empirical JEL Classification: E42, F31, F39 Keywords: Currency exposure; multi-horizon exchange rate; Malaysian Sectors; Wavelet Analysis; MODWT. Reference to this paper should be made as follows: Wahab, H.A; Nasir, N.A.M. (2023). The Wavelet Multi-scale Analysis of Exchange Rate Exposure: An Application to Malaysian Consumer Products and Services Sector, J. Fin. Bank. Review, 8(1), 58 – 72. https://doi.org/10.35609/jfbr.2023.8.1(3)