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

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  • Kevin Cowan
  • Erwin Hansen
  • Luis Oscar Herrera

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.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 346.

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Date of creation: Dec 2005
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Handle: RePEc:chb:bcchwp:346

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References

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Citations

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Cited by:
  1. Júnior, José L. R., 2008. "Exchange Rate Exposure, Foreign Currency Debt and the Use of Derivatives: Evidence from Brazil," Insper Working Papers wpe_141, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. Gatopoulos, Georgios & Loubergé, Henri, 2013. "Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 54-75.
  3. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
  4. Jose De Gregorio, 2013. "Resilience in Latin America: Lessons from Macroeconomic Management and Financial Policies," IMF Working Papers 13/259, International Monetary Fund.
  5. Hake, Mariya & Stix, Helmut & Fidrmuc, Jarko, 2011. "Households’ Foreign Currency Borrowing in Central and Eastern Europe," Working Papers 171, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Martin Brown & Steven Ongena & Pinar Yesin, 2009. "Foreign Currency Borrowing by Small Firms," Working Papers 2009-02, Swiss National Bank.
  7. Júnior, José L. R., 2008. "Corporate Financial Policies and the Exchange Rate Regime: Evidence from Brazil," Insper Working Papers wpe_144, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  8. Luis Carranza & José Enrique Galdón Sánchez & Javier Gómez Biscarri, . "The relationship between investment and large exchange rate depreciations in dollarized economies," Faculty Working Papers 01/08, School of Economics and Business Administration, University of Navarra.
  9. Scott Fulford & Felipe Schwartzman, 2013. "The credibility of exchange rate pegs and bank distress in historical perspective: lessons from the national banking era," Working Paper 13-18, Federal Reserve Bank of Richmond.
  10. Brown, M. & Kirschenmann, K. & Ongena, S., 2009. "Foreign Currency Loans - Demand or Supply Driven?," Discussion Paper 2009-78, Tilburg University, Center for Economic Research.
  11. José Luiz Rossi Júnior, 2008. "Corporate Financial Policies and the Exchange Rate Regime: Evidence from Brazil," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807210957020, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  12. Guillermo A. Calvo & Ernesto Talvi, 2005. "Sudden Stop, Financial Factors and Economic Collpase in Latin America: Learning from Argentina and Chile," NBER Working Papers 11153, National Bureau of Economic Research, Inc.
  13. Jeromin Zettelmeyer & Piroska M. Nagy & Stephen Jeffrey, 2010. "Addressing private sector currency mismatches in emerging Europe," Working Papers 115, European Bank for Reconstruction and Development, Office of the Chief Economist.
  14. Bank for International Settlements, 2007. "Financial stability and local currency bond markets," CGFS Papers, Bank for International Settlements, number 28, January.

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