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Does the currency regime shape unhedged currency exposure?

  • Patnaik, Ila
  • Shah, Ajay

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. 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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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 5 (September)
Pages: 760-769

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:5:p:760-769
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