A currency's misvaluation versus an index of other currencies, termed the currency's multilateral misvaluation, depends on the index weights. This study clarifies the idea of consistency in multilateral misvaluation and provides instructive empirical illustrations using several currency index...

We compare the FX exposure estimates of four empirical models that differ only in the choice of control variable. We use a large sample of U.S. equities (19,100) over a long time span (1980-2011). We find a much higher percentage of statistically significant FX exposure estimates with a bond...

To estimate foreign exchange (FX) cash flow exposure, one may choose between direct and indirect regression approaches, where the direct approach uses accounting-based cash flow data and the indirect approach uses equity returns as a cash flow proxy. The indirect approach typically includes one...

The Economist's adjusted Big Mac index takes GDP into account in currency valuation, but the methodology is not explained. We show that the key to understanding the methodology is to distinguish between a currency's bilateral valuation (versus a specific currency) and the currency's overall...

The popular weighted average cost of capital (WACC) approach to capital budgeting implicitly assumes that a project's debt tax shields will always be used by the firm that adopts the project. We show that even a low probability of selling a project in the future to a firm with a different tax...