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Does the currency regime shape unhedged currency exposure

Ila Patnaik () and Ajay Shah ()
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Ila Patnaik: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time- periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less flexible. We also find homogeneity of views, where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees.

Keywords: Currency regime; Currency exposure of firms; Moral hazard; One-way bets on exchange rates (search for similar items in EconPapers)
JEL-codes: F31 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cwa and nep-ifn
Date: 2008-04
Note: Working Paper 50, 2008
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Related works:
Journal Article: Does the currency regime shape unhedged currency exposure? (2010) Downloads
Working Paper: Does the Currency Regime Shape Unhedged Currency Exposure? (2009) Downloads
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