Operational Hedging of Exchange Rate Risks

Exchange rate exposure of firms diminishes when imported
intermediates and exports are denominated in currencies that move
together. Appreciations of the domestic currency, raising foreign
currency export prices, then also reduce marginal costs, allowing
firms to counter the increase in foreign prices. Using firm-level
data from seven European countries I estimate a structural model
showing how exchange rate pass-through into sales depends on
intermediate imports and the co-movement of export and import
related exchange rates. I find that operational hedging requires
firms to intentionally choose export and import regions with
comoving currencies. Analyzing the locational choice of firms
confirms that the co-movement of currencies indeed appears to be
taken into consideration