FX debt and optimal exchange rate hedging

Laura Alfaro, Julian Caballero and Bryan Hardy

No 1303, BIS Working Papers from Bank for International Settlements

Abstract: This paper examines optimal foreign currency (FX) hedging by non-financial corporations globally. Using a cross-country, firm-level dataset, we first document key patterns of FX borrowing across advanced (AEs) and emerging market economies (EMEs). We find that while FX debt is prevalent in both groups, its intensity varies considerably. We assess the optimality of firms' exchange rate exposures using a risk-management framework where hedging serves to minimize the impact of cash flow volatility on firm value. Our results indicate that most firms hedge optimally, as exposures from FX debt are largely offset by other exposures, like foreign revenues and assets. While the distribution of exchange rate risk is broadly similar between AE and EME firms, the EME distribution has thicker tails, revealing a larger concentration of firms with significant, unhedged depreciation risk.

Keywords: foreign currency debt; currency risk; currency hedging (search for similar items in EconPapers)
JEL-codes: F31 F34 G30 G32 (search for similar items in EconPapers)
Date: 2025-11
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