The effectiveness of currency-hedging techniques over multiple return horizons for foreign-denominated debt issuers

Abstract

In this study we use a unique dataset to examine the effectiveness of hedging techniques in reducing currency risk across different time horizons. Our primary results indicate that issuers of foreign-denominated debt (FDD) effectively use foreign exchange derivatives (FXD) and geographic sales-to-asset alignment to reduce currency exposure. We measure currency exposure, over multiple return horizons, as the sensitivity of firm’s stock returns to changes in the exchange rate while controlling for market’s return. In particular, we find that the use of foreign exchange derivatives is effective in the short-term horizon and the geographic sales-to-asset alignment is effective in the intermediate and longer-term horizons. When we control for foreign sales and for firm size, the primary results are robust. Our study contributes to the literature by providing evidence of the time period when the use foreign exchange derivatives and the geographic sales-to-asset alignment is most effective for issuers of foreign-denominated debt.