scholarly journals Exchange Rate Fluctuations and Firm Leverage

2020 ◽  
Vol 20 (283) ◽  
Author(s):  
Ilhyock Shim ◽  
Sebnem Kalemli-Ozcan ◽  
Xiaoxi Liu
Keyword(s):  
Exchange Rate ◽  
Foreign Currency ◽  
Emerging Market ◽  
Firm Level ◽  
Balance Sheets ◽  
Net Worth ◽  
Exchange Rate Fluctuations ◽  
Level Data ◽  
Firm Leverage ◽  
Foreign Currency Debt

We quantify the effect of exchange rate fluctuations on firm leverage. When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt. These firms can borrow more as a result and increase their leverage. When home currency depreciates, the reverse happens as firms have to de-lever with a negative shock to their balance sheets. Using firm-level data for leverage from 10 emerging market economies during the period from 2002 to 2015, we show that firms operating in countries whose non-financial sectors hold more of the debt in foreign currency, increase (decrease) their leverage relatively more after home currency appreciations (depreciations). Combining the leverage data with firm-level FX debt data for 4 emerging market countries, we further show that our results hold at the most granular level. Our quantitative results are asymmetric: the effects of depre-ciations, that are generally associated with sudden stops, are quantitatively larger than those of appreciations, which take place at a slower pace over time during capital inflow episodes. As our exercise compares depreciations and appreciations of similar size, these results are suggestive of financial frictions being more binding during depreciations than a possible relaxation of such frictions during appreciations.

scholarly journals Bank Balance Sheets and External Shocks in Asia

2021 ◽  
Vol 21 (10) ◽  
Author(s):  
Zefeng Chen ◽  
Sanaa Nadeem ◽  
Shanaka Peiris
Keyword(s):  
Exchange Rate ◽  
Banking Sector ◽  
Foreign Currency ◽  
Balance Sheets ◽  
Foreign Exchange Intervention ◽  
Net Worth ◽  
Asian Economies ◽  
The Exchange Rate ◽  
Bank Balance Sheets ◽  
Panel Vector Autoregression

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

scholarly journals Oil Prices and Firm Returns in an Emerging Market

2021 ◽  
Vol 24 (1) ◽  
pp. 166-187
Author(s):  
Esin Cakan ◽  
Sercan Demiralay ◽  
Veysel Ulusoy
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Stock Returns ◽  
Information Diffusion ◽  
Emerging Market ◽  
Oil Prices ◽  
Nominal Exchange Rate ◽  
Oil Price ◽  
Firm Level ◽  
Level Data

This study examines the oil price effect on Turkish stock market as an emerging country on firm level data. After controlling short term interest rate, nominal exchange rate and crude oil price, we find that firms behave differently to a change in oil prices. The findings include these: i) variations in oil prices do not significantly affect Turkish firm returns. Out of 153, only 38 firms are affected significantly by oil price after controlling exchange rate and interest rate; ii) oil prices influence stock returns of Turkish firms, suggesting that under reaction and gradual information diffusion hypotheses may hold. iii) small and middle-sized firms are more affected negatively from oil price changes, where large-sized firms affected more positively. The empirical findings of this study have potential implications and offer significant insights for both practitioners and policy makers.

Real Exchange Rate Overvaluation and WTO Dispute Initiation in Developing Countries

2016 ◽  
Vol 70 (4) ◽  
pp. 797-821 ◽  
Author(s):  
Timm Betz ◽  
Andrew Kerner
Keyword(s):  
Developing Countries ◽  
Exchange Rate ◽  
Trade Policy ◽  
Foreign Currency ◽  
Real Exchange Rates ◽  
Trade Disputes ◽  
Trade Dispute ◽  
Competitive Disadvantage ◽  
Dispute Initiation ◽  
Foreign Currency Debt

AbstractWhy and when do developing countries file trade disputes at the World Trade Organization (WTO)? Although financial conditions have long been considered an important driver of trade policy, they have been largely absent from the literature on trade disputes. We argue that developing country governments bring more trade dispute to the WTO when overvalued real exchange rates put exporters at a competitive disadvantage. This dynamic is most prevalent in countries where large foreign currency debt burdens discourage nominal currency devaluations that would otherwise serve exporters’ interests. Our findings provide an explanation for differences in dispute participation rates among developing countries, and also suggest a new link between exchange rate regimes and trade policy.

scholarly journals HEDGING CURRENCY RISKS IN INTERNATIONAL BUSINESS USING THE OPPORTUNITIES OF THE INTERNATIONAL FOREIGN EXCHANGE MARKET

2021 ◽  
Author(s):  
Olena Liegostaieva
Keyword(s):  
Exchange Rate ◽  
Foreign Exchange ◽  
International Business ◽  
Foreign Exchange Market ◽  
Foreign Currency ◽  
Exchange Market ◽  
Currency Risk ◽  
Exchange Rate Fluctuations ◽  
Current Value ◽  
Financial Result

The article is devoted to the study of currency risk hedging in international business. The article notes that the international foreign exchange market is the largest and fastest growing of all world markets. The characteristic features of the international currency market are substantiated and offered. It is also noted that foreign exchange transactions provide economic ties between participants located on different sides of state borders: settlements between firms from different countries for the supply of goods and services, foreign investment, international tourism and business travel. It is determined that hedging of currency risks is the protection of funds from the unfavorable movement of exchange rates, and is carried out in fixing the current value of funds by concluding an agreement on the foreign exchange market. When hedging, the risk of exchange rate changes disappears, and this makes it possible to forecast the company's activities and see the financial result, which is not distorted by exchange rate fluctuations, which will allow you to determine product prices, calculate profits, etc. The main difference between hedging and other types of transactions is that its purpose is not to generate additional profits, but to reduce the risk of potential losses, as risk reduction is almost always necessary to pay, hedging, of course, involves additional costs. Hedging is a way to improve business planning. An enterprise wishing to use this service shall pledge the specified amount, from which losses on its positions will be deducted. In today's conditions, thanks to the foreign exchange market, there is a very reliable way to hedge currency risk. This method is to fix the current value of funds by concluding agreements in this market. With hedging, the company eliminates the risk of exchange rate fluctuations, and this allows you to forecast activities and see the financial result, which is not changed by exchange rate fluctuations. Allows you to pre-determine product prices, determine profits, etc. Thus, the principle of hedging in international business is to open a currency position in a foreign currency account for future transactions to convert funds.

scholarly journals Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis

2020 ◽  
Vol 110 (9) ◽  
pp. 2667-2702 ◽  
Author(s):  
Emil Verner ◽  
Győző Gyöngyösi
Keyword(s):  
Foreign Currency ◽  
Debt Crisis ◽  
Spillover Effects ◽  
Household Debt ◽  
Sudden Increase ◽  
Real Economy ◽  
Balance Sheets ◽  
Default Rates ◽  
Foreign Currency Debt ◽  
The Impact

We examine the consequences of a sudden increase in household debt burdens by exploiting variation in exposure to household foreign currency debt during Hungary’s late-2008 currency crisis. The revaluation of debt burdens causes higher default rates and a collapse in spending. These responses lead to a worse local recession, driven by a decline in local demand, and negative spillover effects on nearby borrowers without foreign currency debt. The estimates translate into an output multiplier on higher debt service of 1.67. The impact of debt revaluation is particularly severe when foreign currency debt is concentrated on household, rather than firm, balance sheets. (JEL E21, E32, F34, G51)

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