Events

Prof. Laura Alfaro
Warren Alpert Professor of Business Administration
Harvard Business School

Foreign currency derivative markets are among the largest in the world, yet why and how firms use these instruments, is relatively understudied. We examine firms’ currency risk exposure and their hedging choices by employing a unique dataset covering the universe of FX derivatives transactions in Chile since 2005, together with firm-level information on sales, international trade, trade credits and foreign currency debt. We uncover four novel facts: (i) natural hedging of currency risk is limited, (ii) financial hedging is more likely to be used by larger firms and for larger amounts, (iii) firms in international trade are more likely to use FX derivatives to hedge their gross –not net– cash currency risk, and (iv) firms pay different premiums, in particular, for longer maturity contracts. We then show that financial intermediaries affect the forward exchange rate market through a liquidity channel, by leveraging a regulatory negative supply shock that reduced firms’ use of FX derivatives. Overall, financial constraints impact the use of FX derivatives, affecting how firms use these instruments to manage cash flow commitments.

This is a joint seminar organized by HKU, CUHK, City U, HKUST and Lingnan U.

Please contact Xiameng PAN at xmpan@connect.hku.hk for registration.