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Foreign Currency Invoicing of Domestic Transactions as a Hedging Strategy Theory and Evidence for Uruguay

Author

Listed:
  • Gerardo Licandro

    (Banco Central del Uruguay)

  • Miguel Mello

    (Banco Central del Uruguay)

Abstract

In this paper we study the factors associated to the use of the US Dollar for the invoicing of domestic transactions, as a common practice of Uruguayan firms. We first build a basic model to understand the role that foreign currency invoicing might have as a financial hedging strategy in the case of a firm that exports in foreign currency, has imported imports and has both assets and liabilities in domestic and foreign currency. We show that risk averse firms might use their flows position in order to hedge currency mismatches in their stocks. Domestic invoicing of transactions is more likely the larger are negative financial positions of firms, the bigger the share of imported inputs and the smaller the share of exports. We then estimate several models for the fraction of domestic sales invoiced in foreign currency and find evidence that supports the intuition of the model.

Suggested Citation

  • Gerardo Licandro & Miguel Mello, 2017. "Foreign Currency Invoicing of Domestic Transactions as a Hedging Strategy Theory and Evidence for Uruguay," Documentos de trabajo 2017004, Banco Central del Uruguay.
  • Handle: RePEc:bku:doctra:2017004
    as

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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/4.2017.pdf
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    References listed on IDEAS

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    Cited by:

    1. María Victoria Landaberry & Miguel Mello, 2019. "Inherited Dollarization: Persistence of US Dollar Pricing in Consumer Goods Markets," Documentos de trabajo 2019005, Banco Central del Uruguay.

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    More about this item

    Keywords

    Hedging; Exchange Rate Risk; Dollarization; Uruguay;
    All these keywords.

    JEL classification:

    • G - Financial Economics
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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