Abstract
A variety of theories have been developed regarding optimal hedging which attempt to explain the reasons firms may be interested in hedging. The study of hedging for exchange rate risk has usually focused on the use of derivatives and to a lesser extent on the use of other types of financial and operational hedging. Debt denominated in foreign currency acts as a natural hedge to the firm's exposure in that currency. This paper has reviewed the main arguments from these theories and several studies which have attempted to determine if firms behave according to the principles established in the theories of optimal hedging when companies use foreign currency debt as currency hedging instrument.
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