Lending Relationships and Currency Hedging

Firms’ currency exposure may result in financial distress and trigger macroeconomic instability. Such exposure can be hedged using currency over-the-counter derivatives. We investigate whether and how lending relationships affect the access to these derivatives using novel loan and derivatives microdata. We document that firms are more likely to buy derivatives from one of their lenders than from a non-lending bank. We also find that prices are lower for derivatives provided by the main lender. These results are stronger among small firms. Our findings are consistent with lending relationships mitigating information asymmetries and derivatives reducing a bank’s loan portfolio risk.