Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms

Abstract

This article appeared in a journal published by Elsevier. The attached copy is furnished to the author for internal non-commercial research and education use, including for instruction at the authors institution and sharing with colleagues.Other uses, including reproduction and distribution, or selling or licensing copies, or posting to personal, institutional or third party websites are prohibited. b s t r a c tWe investigate the determinants of firms' use of foreign currency derivatives in emerging markets exposed to currency crises. We develop a model where a firm with international orientation chooses its optimal foreign debt and hedging ratio. In the context of highly volatile exchange rate periods in five Latin American countries, we calibrate the model on ADRs. We find theoretical and empirical evidence that country specific factors (i.e. aggregate exposure of a country to a crisis) explain significantly part of our firms' foreign debt and hedging policy, as opposed to literature on firms in developed markets. We claim that derivative markets have been effective tools for firms in these countries, at least in the post-crisis era.

How using derivatives affects bank stability in emerging countries? Evidence from the recent financial crisis

“…Moreover, Warren Buffett (2002) has called derivatives ''financial weapons of mass destruction''. Gatopoulos and Loubergé (2013) investigate the determinants of firms' use of foreign currency derivatives in Latin American countries exposed to currency crises. They claim that derivative markets have been effective tools for firms in these countries, at least in the post-crisis era.…”

“…Furthermore, Gatopoulos and Loubergé (2013) argue that derivative markets have been effective tools for firms in emerging countries, at least in the post-crisis era.…”

“…As previous papers (Nikkinen el al., 2012;Gatopoulos and Loubergé, 2013;Chiaramonte et al, 2013), the whole period is divided in two subperiods: the pre-crisis period (from 2003 to 2006) and the crisis & the post-crisis period (from 2007 to 2011). The motivation to separate between these two periods is to compare the effect of derivatives use on bank stability in ordinary period and in period of turbulence.…”

State ownership and the risk‐reducing effect of corporate derivative use: Evidence from China

“…In addition, our paper enriches the burgeoning literature on derivative use in emerging economies. Prior studies related to derivative use in emerging markets focus on one specific type of financial derivative use (Gatopoulos & Loubergé, 2013;Shao et al, 2019). While focusing on a certain kind of derivative is beneficial, this approach has inherent limitations, such as less powerful tests due to limited generalizability.…”

Effects of Foreign-Currency Debt on Non-Financial Latin American Firms: Evidence from the 2000s

“…29 That paper, while focusing on how CEO and CFO characteristics shape the decisions to use financial derivatives for a sample of US public firms, introduces several controls in their derivatives regressions from which we borrow for this paper. 30 For Emerging Markets, Gatopoulos and Loubergé (2013) reason is the presence of the lag of the investment-to-fixed-assets ratio as a regressor of the first equation. For these cases the alternative method is the GMM-based one by Blundell and Bond (1998) that explicitly recognizes the endogeneity of that lag.…”