Currency Mismatches, Balance Sheet Effects and Hedging in Chilean Non-Financial Corporations

Inter-American Development Bank Working Paper No. 521

50 Pages Posted: 28 Feb 2005

See all articles by Kevin Cowan

Kevin Cowan

Adolfo Ibanez University

Luis O. Herrera

affiliation not provided to SSRN

Erwin Hansen

University of Chile - Department of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

Using a new database on the currency composition of assets and liabilities this paper explores the determinants and consequences of currency mismatches in Chilean non-financial firms. As in previous firm level studies for Chile, we find that in periods following a depreciation firms with higher dollar debt do not underperform their peso counterparts. However, once we adequately control for differences in the currency composition of assets, income and net derivative positions, we do find a significant balance sheet effect. In addition, we find that derivatives play a role in insulating firm level investment from exchange rate shocks. In line with previous studies, we also find evidence of currency matching in Chilean corporates. Firms in Chile actively reduce the risks associated with exchange rate exposure by matching the currency composition of their debt with that of their income and assets, and by taking on derivatives if no "real" hedge is available. Finally, we find significant changes in the level of net currency exposure after the exchange rate was floated in 1999. We argue that one possible interpretation of these results is due to the effect of higher exchange rate variance on the relative risk of domestic and foreign debt.

Keywords: investment, financial crises, net worth, currency

JEL Classification: E22, F41, G31

Suggested Citation

Cowan, Kevin and Herrera, Luis Oscar and Hansen, Erwin, Currency Mismatches, Balance Sheet Effects and Hedging in Chilean Non-Financial Corporations (January 2005). Inter-American Development Bank Working Paper No. 521, Available at SSRN: https://ssrn.com/abstract=674081 or http://dx.doi.org/10.2139/ssrn.674081

Kevin Cowan (Contact Author)

Adolfo Ibanez University ( email )

Santiago
Chile

Luis Oscar Herrera

affiliation not provided to SSRN

Erwin Hansen

University of Chile - Department of Business Administration ( email )

Diagonal Paraguay 257
Santiago, 8330015
Chile

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