This paper examines the volatility of economy-wide and industry-specific peso exchange rates during the period 1998-2006, and assesses the impact of such volatility on the profitability of a sample of listed Philippine banks and corporate firms. Our regression results provide evidence that volatility in foreign exchange rates affect the profitability of firms. Furthermore, there are gains in explanatory power when industry exchange rates are used instead of aggregate exchange rates as an explanatory variable for stock price return. Our results also show that the operations and risk management systems in place in different firms are sufficiently heterogenous to the extent that the impact of foreign exchange volatilities in their
profitability differs across sectors and even among firms within a sector. These results suggest that there is no one-size-fits-all foreign exchange policy, and a firm or
a sector might be negatively affected by foreign exchange developments even as other sectors of the economy benefit. This implies that initiatives from policymakers
that encourage the development of risk management mechanisms become necessary conjugates to policies aimed at making the foreign exchange market more efficient.
