Granular Corporate Hedging Under Dominant Currency

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 (2005Chile ( -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.

The Channels of International Comovement

“…Many papers find evidence of operational hedges implemented by multinational companies (Alfaro, Calani and Varela, 2021;Hoberg and Moon, 2017;Colacito, Qian and Stathopoulos, 2021). However, these papers typically study a hedge between only two channels of exposure, and they focus primarily on hedging of foreign currency exposure.…”

Global Capital Allocation

“…Some larger corporations have started reporting their hedging strategy and there is evidence for some specific countries (e.g. Alfaro et al (2021) for Chile), but providing systematic evidence is an open research opportunity. One potential conjecture is that financial hedging is more likely in large developed currencies that have liquid derivatives markets while operational hedging is more likely in emerging market currencies.…”

Yet it Endures: The Persistence of Original Sin

“…Schittman ( 2010 ) shows that hedging of currency exposure in single- and multi-country bond portfolios can significantly reduce the volatility of returns for Germany, Japanese, British and American investors. Alfaro et al ( 2021 ) analyze foreign exchange derivative transactions in Chile. They show that financial hedging is used mainly by large firms and that firms pay significantly larger premiums for longer maturity contracts.…”