Research

This paper studies the heterogeneous hedging strategies of non-financial firms in emerging market economies against exchange rate uncertainty. We show that even if large firms are prevalent in the derivatives market, they present smaller shares of covered Foreign Currency (FC) debt in comparison to smaller firms. We rationalize this pattern in two ways: i) The market of covered FC debt presents lack of liquidity related to the financial frictions faced by banks; which limits entry of small firms and the extent of large firms' hedges. ii) Sterilized foreign exchange interventions distort firms use of covered FC debt. Moderate interventions reduce hedge size and the probability of entry for small firms that are implicitly protected by the monetary authority, enabling them to bypass fixed entry costs. Large interventions spillover FC liquidity to the derivatives market, increasing the hedges of big firms as these interventions reduce their variable costs. We provide theoretical and empirical evidence for these two explanations with rich firm-level panel data for Colombia.

Draft.