Research

This paper studies the heterogeneous hedging strategies of non-financial firms in emerging market economies against exchange rate uncertainty. We show that, although large firms are prevalent in the derivatives market, they hold smaller shares of covered Foreign Currency (FC) debt compared to smaller firms. We rationalize this pattern in two ways: i) The market for covered FC debt lacks liquidity due to the granularity of the economy and macroprudential policies on the FC exposures of banks, which limits the entry of small firms and the extent of large firms' hedges. ii) Sterilized Foreign Exchange (FX) interventions distort firms' use of covered FC debt. Moderate FX sales 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 FX sales spill FC liquidity into the derivatives market, increasing the hedges of large firms as these interventions reduce their variable costs. We provide theoretical and empirical evidence for these two explanations using rich firm-level panel data for Colombia.

Draft.

We empirically disentangle the short vs medium-run effects of exchange rate movements, on the investment of non-financial firms in Colombia from 2005 to 2019. We find that a structural depreciation of the peso weights on investment through a balance-sheet effect for firms with Foreign Currency (FC) debt. Exports provide a natural hedge against exchange rate fluctuations but only in the short-run. FC forwards protect firms against surprise currency depreciations; nevertheless, they present a cost of opportunity in terms of real investment. We also find that in periods of a depreciated exchange rate, big firms financially hedge while export-oriented firms and foreign firms use natural hedging and their relationship with headquarters to protect themselves against exchange rate movements. We rationalize our findings with the international macro and micro-finance literature. 

Draft.

This paper examines the role of deposit franchise in mitigating interest rate risk among Latin American commercial banks over the period 2005-2023. Using individual bank estimates and panel dataset across multiple countries, we estimate expense betas—the sensitivity of funding costs to policy rate changes—as a measure of franchise strenght. We find that Latin American banks exhibit average betas of 10%, signifcantly lower than the 35 - 40% observed in the U.S. and European banks, indicating strong franchise effects. We find that overhead costs and market power, rather than bank size, explain beta variation. While interest rate increases reduce deposit and loan volumes, they have limited effects on income, underscoring the franchise's stabilizing role.    

Draft.