Abstract
We explore the link between firms' dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). We first document that firms substitute domestic for dollar borrowing when the corporate basis widens. Additionally, we find that when these funding opportunities appear, the currency substitution is greater for highly rated firms. The willingness of highly rated firms to issue dollar bonds when the basis widens is stronger during periods of heightened demand for dollar-denominated safe assets.
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