Financial Hedging Beyond Dominant Currency

Laura Alfaro, Mauricio Calani and Liliana Varela

No 16232, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper challenges the view that dominant-currency invoicing shields firms from exchange-rate risk, showing that natural hedging offers limited protection. A unique firm-level dataset linking Chilean firms to international trade transactions, FX derivatives, and foreign debt over 20 years shows that dollar cash flows are sparse and rarely synchronized: 10–20% of inflows and outflows coincide for the median firm. Firms retain currency risk, managed through financial derivatives. Hedging intensity increases with exchange-rate volatility and decreases with greater FX coincidence, consistent with the model. Analyzing the causal impact of hedging costs on firm performance, by exploiting a regulatory shock that unexpectedly raised the cost and limited liquidity, shows that more exposed firms experienced a 0.3p.p. decline in sales growth, a 0.2p.p in employment, and 0.28p.p in intermediate-input use. These patterns show that risk-management capacity is tied to firms’ real performance, and that frictions in derivatives markets affect the real economy.

Keywords: Natural; hedging (search for similar items in EconPapers)
JEL-codes: F14 F2 F31 F38 F4 G30 (search for similar items in EconPapers)
Date: 2021-06
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