Derivatives and Exchange Rate Hedging Strategies in Uruguayan Firms

The present work analyzes the use of derivatives and the interaction with alternative hedging strategies of exchange rate risk. The knowledge, use and eventual interest in the hedging of risks with financial derivatives are analyzed, due to the state of development of the market in Uruguay. We develop empirical models that explain the determinants of the decision to use derivatives and interest in the use of derivatives, with the particularity of endogenously modeling the alternative hedging strategies that firms use. A relevant result is the that the Uruguayan firms make cover maintaining high levels of liquidity and invoicing in foreign currency in the domestic market. The endogeneity of both strategies was confirmed, and a negative and significant correlation was found between the use of these strategies and the use, and interest in using, of financial derivatives. Also, large firms are more likely to use sophisticated instruments. It seems to be an asymmetrical concern about exchange rate risk, firms that maintain currency mismatches flows in favor of the dollar are less likely to use hedging strategies.