Foreign Currency Exposures of Firms and Households
Paper Session
Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Adrien Verdelhan, Massachusetts Institute of Technology
Firms, Currency Hedging and Financial Derivatives
Abstract
The use of foreign currency is prevalent in international markets. Firms in international trade and capital markets must decide how to cope with foreign currency risk associated with buying inputs and selling output abroad as well as financing. In this chapter, we overview the emerging literature exploiting new granular data sets and analyzing the use of FX derivatives and currency risk management, which are both shaped by the existence of financial frictions.Exchange Rate Transaction and Translation Risk
Abstract
If a firm invoices a transaction in a foreign currency, a delay of payment between thetransaction date and the settlement date exposes the firm to exchange rate risk. In their
income statements, firms report such exchange rate gains and losses, signaling their exposure
to currency risk. Using these publicly available accounting data, this paper revisits the
exchange rate disconnect puzzle at the firm level. We focus on two countries, Japan and the
United States, that exhibit a similar trade openness but two very different shares of foreign
currency invoicing. We find that an appreciation of the yen significantly decreases the net
income and investment of Japanese firms, but an appreciation of the dollar has no significant
effect on the U.S. sample. Exchange rate risk appears linked to the value of Japanese firms:
the higher the exposure to exchange rate risk according to their income statements, the higher
the loadings of their equity returns on exchange rate returns.
How do Borrowers Adjust in a Household Foreign Currency Debt Crisis?
Abstract
This paper studies how households adjust to a large revaluation of foreign currency-denominated household debt. Our analysis uses detailed household-level data during Hungary’s large depreciation in 2008. Relative to similar local currency debtors, foreign currency debtors reduce consumption expenditures approximately one-for-one with increased debt service, suggesting binding liquidity constraints. Foreign currency debtors reduce both the quantity and quality of expenditures, consistent with nonhomothetic preferences and a “flight from quality.” Debt revaluation has no effect on labor market status, hours, or earnings, but there is a small adjustment toward foreign income streams and a substantial increase in home production.Discussant(s)
Adrien Auclert
,
Stanford University
Wenxin Du
,
University of Chicago
Kurt Mitman
,
Institute for International Economic Studies
Antonio Coppola
,
Harvard University
JEL Classifications
- F3 - International Finance
- G0 - General