Currency Hedging: Managing Cash Flow Exposure

57 Pages Posted: 14 Jul 2021

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Mauricio Calani

Central Bank of Chile

Liliana Varela

University of Houston; University of Warwick

Multiple version iconThere are 2 versions of this paper

Date Written: June 2021


Foreign currency derivative markets are among the largest in the world, yet their role in emerging markets is relatively understudied. We study 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 are more likely to pay higher premiums for longer maturity contracts. We then show that financial intermediaries can affect the forward exchange rate market through a liquidity channel, by leveraging a regulatory negative supply shock that reduced firms' use of FX derivatives and increased the forward premiums.

JEL Classification: F31, F38, G30, G38

Suggested Citation

Alfaro, Laura and Calani Cadena, Miguel Mauricio and Varela, Liliana and Varela, Liliana, Currency Hedging: Managing Cash Flow Exposure (June 2021). CEPR Discussion Paper No. DP16232, Available at SSRN:

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Miguel Mauricio Calani Cadena

Central Bank of Chile ( email )

1180 Agustinas St
United States
6702770 (Phone)

Liliana Varela

University of Houston ( email )

3626 Cullen Bvd
Department of Economics
Houston, TX 77204-5882
United States

HOME PAGE: http://

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

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