Working Paper: CEPR ID: DP16232
Authors: Laura Alfaro; Mauricio Calani; Liliana Varela
Abstract: This paper shows that, in a world dominated by vehicle currencies, firms engaging in international operations retain currency risk and hedge it real and financially. We employ a unique dataset covering the universe of trade credit, international trade, foreign currency debt, and FX derivatives contracts with firms' census data in Chile (2005-2018). We document that operational hedging is quantitatively limited, as different maturity, frequency, and amount of FX operations make it difficult to net these exposures. The granular firms complement real hedging using FX financial instruments, which improve their cash flow management and promote their trade and growth.
Keywords: No keywords provided
JEL Codes: F14; F2; F31; F38; F4; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms under dominant currencies retain exchange rate exposure (F31) | Engage in FX risk management (F31) |
| Larger firms hedge exchange rate risk (F31) | Use financial hedging, particularly FX forwards (G15) |
| Firms using FX derivatives (G15) | Show higher sales and trade volume (F10) |
| Use of FX financial instruments (G15) | Improve firms' cash flow management (D25) |
| Regulatory change reducing FX derivatives supply (G18) | Firms decreased imports (F14) |
| Regulatory change reducing FX derivatives supply (G18) | Firms decreased employment (J63) |