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Does the currency regime shape unhedged currency exposure

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Author Info
Patnaik, Ila () (National Institute of Public Finance and Policy)
Shah, Ajay () (National Institute of Public Finance and Policy)

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Abstract

This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time- periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less flexible. We also find homogeneity of views, where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees.

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Publisher Info
Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number 50.

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Length: 27
Date of creation: Apr 2008
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Handle: RePEc:npf:wpaper:50

Note: Working Paper 50, 2008
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Web page: http://www.nipfp.org.in/working_paper/

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Related research
Keywords: Currency regime Currency exposure of firms Moral hazard One-way bets on exchange rates

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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