Is Foreign Currency Denominated Debt a Hedging Instrument?

42 Pages Posted: 5 Apr 1999  

Simi Kedia

Rutgers Business School

Abon Mozumdar

Virginia Polytechnic Institute & State University - Department of Finance

Date Written: February 1999

Abstract

We examine the role of foreign currency denominated debt in firms' risk management activities. In a sample of large US firms, we find a strong relation between aggregate foreign exchange exposure and foreign currency denominated debt. This relationship between exposure and foreign currency denominated debt also holds at the individual currency level. Firms' choice of denominating debt in Australian Dollar, Canadian Dollar, French Franc, German Mark, Italian Lira and British Pound is related to their exposure in these currencies. However, firms' choice of denominating debt in Swiss Franc and Japanese Yen is influenced not by exposure in these currencies, but by the high liquidity offered by the debt markets in these currencies. The evidence also suggests that creditor rights and information asymmetries influence choice of currency of debt. However, we find no evidence in favor of tax arbitrage induced currency preferences in the denomination of debt.

JEL Classification: G10, G15, G30, G32

Suggested Citation

Kedia, Simi and Mozumdar, Abon, Is Foreign Currency Denominated Debt a Hedging Instrument? (February 1999). Available at SSRN: https://ssrn.com/abstract=155568 or http://dx.doi.org/10.2139/ssrn.155568

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Abon Mozumdar (Contact Author)

Virginia Polytechnic Institute & State University - Department of Finance ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
703-538-8414 (Phone)
703-538-8415 (Fax)

HOME PAGE: http://www.nvc.vt.edu/abon

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