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FX debt and optimal exchange rate hedging

Author

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  • Laura Alfaro
  • Julian Caballero
  • Bryan Hardy

Abstract

This paper examines optimal foreign currency (FX) hedging by non-financial corporations globally. Using a cross-country, firm-level dataset, we first document key patterns of FX borrowing across advanced (AEs) and emerging market economies (EMEs). We find that while FX debt is prevalent in both groups, its intensity varies considerably. We assess the optimality of firms' exchange rate exposures using a risk-management framework where hedging serves to minimize the impact of cash flow volatility on firm value. Our results indicate that most firms hedge optimally, as exposures from FX debt are largely offset by other exposures, like foreign revenues and assets. While the distribution of exchange rate risk is broadly similar between AE and EME firms, the EME distribution has thicker tails, revealing a larger concentration of firms with significant, unhedged depreciation risk.

Suggested Citation

  • Laura Alfaro & Julian Caballero & Bryan Hardy, 2025. "FX debt and optimal exchange rate hedging," BIS Working Papers 1303, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1303
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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