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Does the currency regime shape unhedged currency exposure

Author

Listed:
  • Patnaik, Ila

    () (National Institute of Public Finance and Policy)

  • Shah, Ajay

    () (National Institute of Public Finance and Policy)

Abstract

This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time- periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less flexible. We also find homogeneity of views, where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees.

Suggested Citation

  • Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
  • Handle: RePEc:npf:wpaper:08/50
    Note: Working Paper 50, 2008
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    File URL: http://www.nipfp.org.in/working_paper/wp_2008_50.pdf
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    3. Kurt Hornik & Friedrich Leisch & Christian Kleiber & Achim Zeileis, 2005. "Monitoring structural change in dynamic econometric models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(1), pages 99-121.
    4. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
    5. Martinez, Lorenza & Werner, Alejandro, 2002. "The exchange rate regime and the currency composition of corporate debt: the Mexican experience," Journal of Development Economics, Elsevier, vol. 69(2), pages 315-334, December.
    6. repec:hrv:faseco:34721963 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Rossi Jr, José Luiz, 2009. "Corporate financial policies and the exchange rate regime: Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 10(4), pages 279-295, December.
    2. repec:ipg:wpaper:2014-088 is not listed on IDEAS
    3. Manish K. Singh & S. Ramann, 2014. "User right as a mezzanine capital investment: Innovations in infrastructure debt financing," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2014-027, Indira Gandhi Institute of Development Research, Mumbai, India.

    More about this item

    Keywords

    Currency regime ; Currency exposure of firms ; Moral hazard ; One-way bets on exchange rates;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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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