Operational and financial hedging: Evidence from export and import behavior

Abstract

We use hand-collected data on a sample of German public firms during 2011-2014 to show that firms use currency derivatives more often when they export or import, and especially when exchange-rate fluctuations are larger, but to a lesser extent when having high export and import shares simultaneously. We interpret this finding as evidence of operational hedging that arises as foreign-denominated revenues and costs match, and substitutes for financial hedging. Our identification strategy uses both cross-sectional heterogeneity in exchange-rate exposures and time-series variation in exchange-rate fluctuations. We highlight the importance of examining operating strategies as integral determinants of corporate financing policies.

Firm Foreign Activity and Exchange Rate Risk

“…We also estimate these regressions by lagging the independent variables and find that our findings are unchanged.26 Besides for the U.S., going back toAllayannis, Ihrig, & Weston (2001) among others, hedging activity has been documented also in Korea, seeBae, Kim, & Kwon (2018); in Europe, seeLyonnet, Martin, & Mejean (2021), in Germany, seeKuzmina & Kuznetsova (2018), in Brazil, seeRossi (2013); in Chile, seeMiguel (2016), in Colombia, seeAlfonso-Corredor (2018), and in Mexico, seeAverell, Stein, Konigsberg, & Calixto López Castañon (2021).…”

Optimal hedging in the presence of internal flexibility

“…Generally, operational hedging does not increase firm value unless it is combined with financial hedging (Allayannis et al, 2001;Gleason et al, 2005;Kim et al, 2006;Zhao & Huchzermeier, 2017). Opposite results were also discovered in financial firms (Hankins, 2011) and businesses where operating exposures cancel each other out (Kuzmina & Kuznetsova, 2018). More conflicting results exist in the airline industry where multiple types of operational hedging exist (Berghöfer & Lucey, 2014;Treanor et al, 2013).…”

“…To proxy for operational hedging, we consider marketing strategy that shares the same diversification effects as geographic dispersion. Diversification strategies dominate financial hedging under specific conditions (Hutson & Laing, 2014;Kuzmina & Kuznetsova, 2018;Wong, 2007).…”

“…In Amaya et al (2015), hedging simply reduces the variance of ε s,t . We do not use this specification because hedging efficiency decreases with market volatility and noise (Kuzmina & Kuznetsova, 2018).…”

“…Financial hedging reduces unrealized risk, whereas marketing strategy reduces the continued losses caused by realized shocks. The contrast is accepted and empirically tested by Kim et al (2006), Treanor et al (2014, and Kuzmina and Kuznetsova (2018). However, the relationship is not simply complementary, as the tests assumed.…”