Currency carry trades, risk management, and firm value: Evidence from Korean banking industry

Abstract

I examine the relationship between a firm's risk-taking, risk management, and firm value using a unique dataset of banks' currency carry trades. I find that banks can significantly increase bank value by hedging market and credit risks while engaging in carry trades. I also find that interest rate differentials stemming from monetary policy divergences have a significant impact on banks' risk-taking. The empirical results show that banks can increase their market value more when the interest rate differential is narrower, more sharply when they actively engage in currency carry trades, and most sharply when they actively hedge interactive risks.