Working Paper: NBER ID: w28910
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: Currency Hedging; Corporate Finance; Foreign Exchange Risk
JEL Codes: F31; F38; G30; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FX financial hedging (G15) | firm growth (L26) |
| FX financial hedging (G15) | cash flow management (F32) |
| operational hedging (G13) | retention of currency risk (F31) |
| timing and amounts of cash inflows and outflows (G14) | operational hedging (G13) |
| size of firms (L25) | financial hedging (G19) |
| policy reform reducing the supply of FX derivatives (F31) | utilization of FX derivatives (G15) |
| financial hedging (G19) | sales (M31) |
| financial hedging (G19) | imports (F14) |