Template-Type: ReDIF-Paper 1.0
Author-Name: Laura Alfaro
Author-X-Name-First: Laura
Author-X-Name-Last: Alfaro
Author-Name: Julian Caballero
Author-X-Name-First: Julian
Author-X-Name-Last: Caballero
Author-Name: Bryan Hardy
Author-X-Name-First: Bryan
Author-X-Name-Last: Hardy
Title: FX debt and optimal exchange rate hedging
Abstract: This paper examines optimal foreign currency (FX) hedging by non-financial corporations globally. Using a cross-country, firm-level dataset, we first document key patterns of FX borrowing across advanced (AEs) and emerging market economies (EMEs). We find that while FX debt is prevalent in both groups, its intensity varies considerably. We assess the optimality of firms' exchange rate exposures using a risk-management framework where hedging serves to minimize the impact of cash flow volatility on firm value. Our results indicate that most firms hedge optimally, as exposures from FX debt are largely offset by other exposures, like foreign revenues and assets. While the distribution of exchange rate risk is broadly similar between AE and EME firms, the EME distribution has thicker tails, revealing a larger concentration of firms with significant, unhedged depreciation risk.
Creation-Date: 2025-11
File-URL: https://www.bis.org/publ/work1303.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1303.htm
File-Format: text/html
Number: 1303
Keywords: foreign currency debt, currency risk, currency hedging
Classification-JEL: F31, F34, G30, G32
Handle: RePEc:bis:biswps:1303