and the EURO/USD exchange rate. This means that fluctuations in the EURO/USD will lead to movements.

and the EURO/USD exchange rate. This means that fluctuations in the EURO/USD will lead to movements in BMW’s stock returns. 6.2 Market Index return From the above table, it is clear that the stock return of all six companies, except Audi, has a significant P-value with the parameter of market index return. All the beta values are positive, pointing out a positive relationship between stock market index return and stock return for each company. An increase of market index return leads to an increase of the stock return of that company. Among those companies, we can see that BMW has the highest beta value, 0,781, meaning that BMW stock return is highly sensitive to fluctuations in market index return. Audi has the lowest beta, 0,330, showing that Audi stock return is least sensitive to changes in market index return. 6.3 GDP For all companies, the p-values are higher than 5 % level of significance. It indicates that the relationship between stock return of each company and the GDP for the home country of each company is not significant at the 5% level of significance. The beta values for Volvo, Renault and BMW illustrate a negative linkage. This means that if the GDP goes up, the stock return of these companies goes down. For Saab, Peugeot and Audi, the beta values represent a positive linkage between the stock return and the GDP; meaning that if the GDP goes up the company’s stock return goes also up. 6.4 Oil price The relationship between Oil price and each company’s stock return is not significant at the 5 % significance level since all P-values are above 0,05. Except Saab, all other five companies present a positive linkage between oil price and companies’ stock returns. This means that if the oil price goes up these companies’ stock return will go down. The beta value of Saab presents a negative linkage between oil price and stock return. 46 6.5 R square value for the selected companies Table 3: R square value Company R R Square Std. Error of the Estimate Volvo ,815 ,663 ,1134388 Saab ,69 ,476 ,1186382 Peugeot ,785 ,616 ,1000269 Renault ,738 ,544 ,1385793 BMW ,856 ,734 ,0871836 Audi ,540 ,292 ,2159493 Statistically, R square represents the proportion of the variability in one series that can be explained by the variability of one or more series in a regression model. The above table illustrates the R value for all the selected companies. R2 measures correlation between the dependent and the independent variables. R2 is therefore a statistic measurement that provides information about the goodness of fit of a model. The value of R2 is between 0 and 100 %. If R2 is 1 (100%) the regression line perfectly fits the data. Consequently, the higher the value of R2 the better is the fitness of the model. Four out of six companies represent an R2 above 50 %, meaning that more than 50% of the variations of these companies’ stock returns account for variations in the explanatory variables. BMW represents the highest 0,734; illustrating that the variations in explanatory variables explain 73, 4 % of the variations in the BMW stock return while the remaining 26, 6 % are accounted for other variables not included in the model. 47 In this part, we analyse and discuss the results based on other parts of this paper. We divided this part based on the explanatory variables. 7. Analysis and Discussion 7.1 Exchange rate Looking across all the companies, we observe that BMW is the only company where the stock return is significantly affected by both the short run movements in Euro/USD exchange rate. The sensitivity is positive, meaning that if for example the Euro depreciates by 1%, BMW’ stock return increases with 0, 37 % and vice versa. The finding is consistent with what the chairman of BMW announced in the news, stating that segment earnings were adversely affected by exchange rate movements. The weakness of the dollar has had a big impact on the company’s value. According to Stefan Nydahl (1999) the level of foreign sales/total sales significantly raises currency exposure. Additionally, exports and imports together with foreign investing and speculations are proved to lead to exchange rate exposure. This seems to be the case for BMW, since the US market represents the second most important market after the domestic market. Furthermore, Germany is one of the most open economy in Europe where import and export represent respectively 31, 2 % and 35, 8% (www.exportgermany.com). Thus, the company might be more exposed to exchange risk due to its large exporting activity compared to the other investigated companies. However, this might also be an indication that the company is not using the appropriate hedging strategy to mitigate currency risk since the company still faces losses due to the movements in the Euro/USD exchange rate (for the period investigated). As mentioned in the theory section, several articles in the literature have stated and proved that hedging techniques can be used by MNCs to minimize the impacts of exchange rate movements on assets and liabilities. When analysing the BMW annual report of 2007, we found that the hedging strategies were not clearly explained. This makes it very difficult for us to analyse the results further. Based on both the short and long run, currency movements of the exchange rates SEK/USD and Euro/USD (see figure 2 and 3), should be expected to impact significantly the stock returns of companies involved with businesses using largely these currencies. We observe that these currency exchange rates are very volatile. However, our results 48 indicate that SEK/USD and Euro/USD exchange rate movements were not able to explain movements in the companies’ stock returns for the remaining five companies (Saab, Volvo, Renault, Peugeot and Audi). Compared to the SEK/USD and Euro/USD, The SEK/Euro exchange rate appears to be stable. The small fluctuations of the SEK/euro did not either have an impact on the Swedish companies. There are many reasons why this could be the case. Based on the annual reports of these companies from 2007, several hedging strategies have been used to mitigate currency exchange rate movements. This might indicate that these companies are good in hedging since the movements in exchange rates do not significantly affect their stock returns. For instance, the Volvo Group’s currency risk management is applying financial instruments, such as forward contracts and currency options, to hedge the value of future payment flows in foreign currencies to reduce the short-term adverse effects. We found that most of these companies use hedging strategies, such as currency swaps and foreign exchange forwards. According to Abe de Jong, Jeroen Ligterink and Victor Macrae (2006), due to the fact that most companies have already protected themselves against exchange rate risk by using different hedging strategies, it is difficult to capture exchange rate exposure. We think might also be one of the reasons explaining why we did not find any significant linkage between stock returns and exchange rates for 84% of the investigated companies. Although, Sweden is not part of the Euro zone, we were not able to find any significant difference between how the Swedish companies stock returns are affected by exchange rate movements compared to the French and German companies. This might be explained by the overall more stable value of the SEK towards the Euro compared to the US dollar. By analysing the annual reports (Volvo 2007 and Saab 2006) of Swedish companies, we found that the companies were almost using the same financial derivatives to mitigate currency risk as the one used by French and German companies. We think that this might also be an indication that Swedish companies are able to hedge effectively the additional risks that they might face when being outside the euro zone. 49 7.2 Oil price The oil price is known to be inversely related to stock returns of companies which depend on oil as a basic substance for their product like cars. For the selected companies of this study however, the results did not indicate any significant linkage between stock return and oil price. The reason for this migh
t be that by using the quarterly data, we were not able to capture the strong movements of oil price. This might have been possible, if these two variables were estimated from half year data. As observed in the data presentation, the oil price has been increasing, especially since 2003. This should have lead to a decrease in companies’ stock returns. However, we did not observe this since the linkage between stock return and oil price was too weak. Furthermore, based on the betas, we observe that five of the six companies indicate a positive relationship between oil price and stock returns. Meaning that if oil price goes down stock returns goes down (and vice versa). This is the contrary to some previous studies, which indicate that a fall in oil price should infer an increase in stock prices.