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Foreign debt as a hedging instrument of exchange rate risk: a new perspective

  • Luis Otero Gonzalez
  • Milagros Vivel Bua
  • Sara Fernandez Lopez
  • Pablo Duran Santomil
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    This paper analyzes the factors that determine the use of foreign currency debt to hedge currency exposure for a sample of 96 Spanish non-financial companies listed in 2004. Unlike previous empirical studies, which have attempted to explain the use of foreign currency debt using arguments stemming exclusively from hedging theory, we have complemented the analysis with hypotheses from capital structure theory. In particular, we analyze the variables that determine the decision to hedge with foreign currency debt and hedging volume. On the one hand, we found that the decision to hedge with foreign debt is positively related to the level of foreign currency exposure, size, tax loss carry-forwards, managerial risk aversion and the building, R&D and other services sector; and on the other hand, the extent of hedging is related positively to the foreign currency exposure, size, managerial risk aversion and negatively to the costs of financial distress. We also analyze the interaction between foreign currency debt and derivatives in the hedging decision. Moreover, after controlling for the existence and type of currency swaps, we found that this consideration did not have an effect on the determinants of hedging with foreign currency debt.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481455
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    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 16 (2010)
    Issue (Month): 7 ()
    Pages: 677-710

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    Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:677-710
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