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Does the Currency Regime Shape Unhedged Currency Exposure?

  • Political Science


This paper examines how unhedged currency exposure of firms varies with changes in currency exibility. 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 exible. 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 exibility encourages firms to hold unhedged exposure in response to implicit government guarantees.[NIPFP WP 2008 - 50]

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