Dollar Borrowing, Firm-Characteristics, and FX-Hedged Funding Opportunities

40 Pages Posted: 9 Mar 2020

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Sergio Mayordomo

Banco de España

José María Serena

Bank for International Settlements (BIS)

Multiple version iconThere are 3 versions of this paper

Date Written: February 13, 2020

Abstract

We explore the link between firms' dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for very high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as very high-grade firms gain importance, relative to firms with operational needs.

Keywords: covered interest rate parity, credit spread, debt issuance, dollar convenience yield, foreign exchange rate hedge, limits of arbitrage

JEL Classification: E44, F3, F55, G12, G15, G23, G28, G32

Suggested Citation

Gambacorta, Leonardo and Mayordomo, Sergio and Serena, Jose Maria, Dollar Borrowing, Firm-Characteristics, and FX-Hedged Funding Opportunities (February 13, 2020). BIS Working Paper No. 843, Available at SSRN: https://ssrn.com/abstract=3549533

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sergio Mayordomo

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Jose Maria Serena

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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