Invoicing Currency and Financial Hedging

Abstract

We use the results of a survey conducted on a sample of 3,013 exporting firms located in five euro-countries to explore the link between exporters' currency choice decisions and use of financial instruments to hedge exchange rate risks. Approximately 90% of firms in the sample invoice exports in their (producer) currency. Large firms are however more likely to use another currency. These firms are also more likely to hedge against exchange rate risk, which increases their propensity to invoice in the importer's currency. We propose a model of currency choice and hedging that rationalizes these findings. When the cost of hedging has a fixed component, large firms are more likely to hedge and to invoice in the importer's currency. This has implications for exchange rate pass-through.

JEL Classification: F1, F3, F4