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OTC Markets and Corporate Hedging

English title OTC Markets and Corporate Hedging
Applicant Hau Harald
Number 197775
Funding scheme Project funding (Div. I-III)
Research institution Institut universitaire en finance - GFRI Université de Genève
Institution of higher education University of Geneva - GE
Main discipline Economics
Start/End 01.12.2020 - 31.08.2023
Approved amount 168'498.00
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Keywords (5)

OTC Markets; International Finance; Macroeconomic Stability; FX Forwards; Corporate Hedging

Lay Summary (Italian)

Firms face several kind of risks such as operational, market and exchange rate. They actively manage them to stabilise their profits and increase their firm value. More specifically, they measure and take action (i.e. hedge) to quantify and contain adverse shocks. In case such risks are not properly hedged or cannot be hedged at all, firms might end up having less credit from banks at less-favourable term, or they can even go bankrupt.For instance, Monarch airline was operating in the UK before the Brexit referendum, and It had its asset in GBP while its liabilities were in USD. When the pound dropped in the aftermath of the referendum, the value of its asset shrank and its equity was completely wiped out. This anecdote gives an idea of the importance of having access to efficient FX forward markets to hedge undue exposures. This is what this project aims to do.
Lay summary
Our research seeks to investigate the link between firms’ hedging activities and their expected hedging costs. Furthermore, we are interested in quantifying the impact of a more competitive FX forward market on corporate hedging. We are also trying to understand which the potential real effects of this phenomenon on employment and investments.  Understanding these issues has relevant policy implications for designing a derivative market that better serves the real economy.
Direct link to Lay Summary Last update: 02.11.2020

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Newly available data reveals substantial price discrimination in FX derivative markets against less sophisticated non-financial firms (Hau et al., 2017). A non-financial firm at the 90% quantile of transaction cost distribution pays approximately 20 times the bid-ask spread of a sophisticated financial market participant. This market distortion potentially discourages many firms from hedging FX risks. This project aims to shed light on the effects of such market failures.