Bank for International Settlements study finds FX debt is widespread and most corporates hedge exchange rate risk with heavier tail exposures in emerging markets

The Bank for International Settlements published a working paper assessing how non-financial corporates use foreign currency (FX) debt and whether they hedge exchange rate risk “optimally” in a risk-management framework. Using cross-country firm-level evidence, it finds that FX borrowing is common in both advanced economies and emerging market economies, and that most firms’ exchange rate exposures appear broadly offset by other balance-sheet or operational exposures, although emerging markets show a larger concentration of firms with significant unhedged depreciation risk. The paper builds stylised facts on FX borrowing from a dataset covering over 66,000 large non-financial firms in 47 countries over 2005–2023, highlighting wide cross-country variation even within advanced and emerging economy groupings (eg around 40% of sampled firms in both Mexico and Switzerland report FX debt at least once reaching 50% or more of total debt). Optimal hedging tests are run on a subset of 8,256 listed firms in 38 countries using firm-specific regressions linking enterprise value, cash from operations and exchange rate changes; estimated sensitivities cluster around zero for both advanced and emerging economy firms, but the emerging market distribution has fatter tails and is skewed toward depreciation risk. Decompositions suggest FX debt exposures are typically offset by other exposures, with FX revenues and FX assets playing a clearer hedging role against FX debt for emerging market firms than for advanced economy firms.