Financial Hedging Beyond Dominant Currency

This paper challenges the view that dominant-currency invoicing shields firms from exchange-rate risk, showing that natural hedging offers limited protection. A unique firm-level dataset linking Chilean firms to international trade transactions, FX derivatives, and foreign debt over 20 years shows that dollar cash flows are sparse and rarely synchronized: 10–20% of inflows and outflows coincide for the median firm. Firms retain currency risk, managed through financial derivatives. Hedging intensity increases with exchange-rate volatility and decreases with greater FX coincidence, consistent with the model. Analyzing the causal impact of hedging costs on firm performance, by exploiting a regulatory shock that unexpectedly raised the cost and limited liquidity, shows that more exposed firms experienced a 0.3p.p. decline in sales growth, a 0.2p.p in employment, and 0.28p.p in intermediate-input use. These patterns show that risk-management capacity is tied to firms’ real performance, and that frictions in derivatives markets affect the real economy.