DP14419 Dollar borrowing, firm-characteristics, and FX-hedged funding opportunities

Author(s): Leonardo Gambacorta, Sergio Mayordomo, Jose-Maria Serena Garralda
Publication Date: February 2020
Keyword(s): Covered interest rate parity, credit spread, debt issuance, dollar convenience yield, foreign exchange rate hedge, Limits of arbitrage
JEL(s): E44, F3, F55, G12, G15, G23, G28, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14419

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). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs.