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Real Consequences of Foreign Exchange Derivatives Hedging
I exploit a quasi-natural experiment in South Korea to examine the real effects of foreign exchange derivatives (FXD) hedging. By using cross-bank variation in the tightness of an FX regulation designed to discourage risk-taking by financial intermediaries, I show that the regulation caused a decline in the supply of FXD, resulting in a substantial reduction in exports, especially for small firms that relied heavily on FXD hedging. I provide a mechanism involving firms’ costly external financing, as well as their costly switching of banking relationships and banks’ costly equity ...