Tag: financial hedging

Why the National Bank of Georgia Is Ditching Dollars for Gold

Posted on June 18, 2024 | Policy Brief

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The National Bank of Georgia (NBG) recently acquired 7 tons of high-quality monetary gold valued at $500 million, constituting approximately 11 percent of the banks’ total reserves. This marked the first occasion that Georgia acquired gold for its reserves since regaining its independence. The acquisition is a significant event, prompted by the NBG’s stated aim to enhance diversification amidst increased global geopolitical risks. However, diversification is just one of the reasons many countries are extensively purchasing gold. Another reason for increasing gold reserves is to lessen one’s reliance on the US dollar and to protect against sanctions, as seen with Russia and Belarus following the annexation of Crimea. While the NBG’s gold acquisition aligns with economic rationale, recent domestic developments suggest other motives. Actions like sanctions on political figures, anti-Western rhetoric, and recent legislation (the Law of Transparency of Foreign Influence), diverging Georgia from an EU pathway call for speculation that the gold purchase is driven by fear a of potential sanctions and as a preparedness strategy.

Introduction

The National Bank of Georgia (NBG) has broken new ground by adding gold to the country’s international reserves for the first time ever. Georgia has thus become the first country in the South Caucasus to purchase gold for its reserves. In line with its Board’s decision on March 1, 2024, the NBG procured 7 tons of the highest quality (999.9) monetary gold. The acquisition, valued at 500 million US dollars, took the form of internationally standardized gold bars, purchased from the London gold bar market and currently stored in London. Presently, the acquired gold represents approximately 11 percent of the NBG’s international reserves (see Figure 1).

Figure 1. NBG’s Official Reserve Assets and Other Foreign Currency Assets, 2023-2024.

Source: The National Bank of Georgia.

The NBG emphasizes in its official statement that the acquisition of gold is not merely symbolic but rather reflects a deliberate strategy of diversifying NBG’s portfolio and enhancing its resilience to external shocks. The NBG’s decision was made during a period marked by significant economic and political events both within and outside Georgia. Key among these were global and regional geopolitical tensions that amplified concerns about economic downturns and rising inflation. The Covid-19 pandemic in 2020 led to stagflation across many countries, including Georgia. Despite some recovery in GDP, high inflation continued into 2021. Furthermore, the Russian war on Ukraine disrupted supply chains, and pushed global inflation to a 24-year high 8.7 percent  in 2022. In response, stringent monetary policies aimed at controlling inflation were implemented across both developing and advanced economies. Looking ahead, there is an expectation of a shift toward more expansionary monetary policies that should help lower interest rates (and lower yields on assets held by central banks). These global conditions provide context for the NBG’s strategic focus on diversification.

However, alongside these economic events, Georgia also faces significant political challenges. Since the beginning of Russia’s war in Ukraine in 2022, political tensions in Georgia have escalated. Notable actions such as the U.S. imposing sanctions on influential Georgian figures, including judges and the former chief prosecutor, have, among other things, intensified scrutiny into the Russian influence in Georgia. Concerns about the independence of the Central Bank, which changed the rule of handling sanctions applications for Georgia’s citizens, and legislative initiatives like the Law of Transparency of Foreign Influence, which undermines Georgia’s EU accession ambitions, have triggered reactions from the country’s partners and massive public protests. Moreover, anti-Western rhetoric from the ruling party has raised concerns. In addition, the parliament of Georgia recently approved an amendment to the Tax Cide, a so-called ‘law on offshores’. The opaque nature of the law, as well as the context and speed at which it was advanced, sparked outcry and conjecture about its true purpose. These elements lead to speculation that the decision to purchase gold may be motivated by a desire for greater autonomy or a fear of potential sanctions, rather than purely economic reasons.

In the context of the above, this policy brief seeks to explore the motivations behind gold acquisitions by Central Banks, drawing on the experiences of both developed and developing countries. It aims to review existing literature that explores various reasons for gold acquisitions, providing a comprehensive analysis of economic and potentially non-economic factors influencing such decisions.

The Return of Gold in Global Finance

Over the past decade, central bank gold reserves have significantly increased, reversing a 40-year trend of decline. The shift that began around the time of the 2008-09 Global Financial Crisis is depicted in Figures 2 and 3, highlighting the transition from a pre-crisis period of more countries selling gold, to a post-crisis period where more countries have been purchasing gold.

Figure 2. Gold Holdings in Official Reserve Assets, 1999-2022 (million fine Troy ounces).

Source: IMF, International Financial Statistics.

Figure 3. Number of Countries Purchasing/Selling Monetary Gold, 2000-2021 (at least 1 metric ton of gold in a given year).

Source: IMF, International Financial Statistics.

In 2023, central banks added a considerable amount of gold to their reserves. The largest purchases have been reported for China, Poland, and Singapore, with these nations collectively dominating the gold buying landscape during the year.

China is one of the top buyers of gold worldwide. In 2023, the People’s Bank of China  emerged as the top gold purchaser globally, adding a record 225 tonnes to its reserves, the highest yearly increase since at least 1977, bringing its total gold reserves to 2,235 tonnes. Despite this significant addition, gold still represents only 4 percent of China’s extensive international reserves.

The National Bank of Poland was another significant buyer in 2023, acquiring 130 tonnes of gold, which boosted its reserves by 57 percent to 359 tonnes, surpassing its initial target and reaching the bank’s highest recorded annual level.

Other central banks, including the Monetary Authority of Singapore, the Central Bank of Libya, and the Czech National Bank, also increased their gold holdings, albeit on a smaller scale. These purchases reflect a broader trend of central banks diversifying their reserves and enhancing financial security amidst global economic uncertainties.

Conversely, the National Bank of Kazakhstan and the Central Bank of Uzbekistan were notable sellers, actively managing their substantial gold reserves in response to domestic production and market conditions. The Central Bank of Bolivia and the Central Bank of Turkey also reduced their gold holdings, primarily to address domestic financial needs.

The U.S. continues to hold the world’s largest gold reserve (25.4 percent of total gold reserves), which underscores the metal’s enduring appeal as a store of value among the world’s leading economies. The U.S. is followed by Germany at 10.5 percent, and Italy and France at 7.6 percent respectively. At present, around one-eighth of the world’s currency reserves comprise of gold, with central banks collectively holding 20 percent of the global gold supply (NBG, 2024).

Why Central Banks are Buying Gold Again

A 2023 World Gold Council survey (on central banks revealed five key motivations for holding gold reserves: (1) historical precedent (77 percent of respondents), (2) crisis resilience (74 percent), (3) long-term value preservation (74 percent), (4) portfolio diversification (70 percent), and (5) sovereign risk mitigation (68 percent). Notably, emerging markets placed a higher emphasis (61 percent) on gold as a “geopolitical diversifier“ compared to developed economies (45 percent).

However, the increasing use of the SWIFT system for sanctions enforcement (e.g., Iran in 2015 and Russia in 2022) has introduced a new factor influencing gold purchases of some governments: safeguarding against sanctions (Arslanalp, Eichengreen and Simpson-Bell, 2023).

In addition, Arslanalp, Eichengreen, and Simpson-Bell (2023) conclude that central banks’ decisions to acquire gold are primarily driven by the following factors; inflation, the use of floating exchange rates, a nation’s fiscal stability, the threat of sanctions, and the degree of trade openness (see Figure 4).

Figure 4. Determinants of Gold Shares in Emerging Market and Developing Economies.

Source: Arslanalp, Eichengreen, and Simpson-Bell (2023).

Gold as a Hedging Instrument

Gold is considered a safe haven and an attractive asset in periods of significant economic, financial, and geopolitical uncertainty (Beckman, Berger, & Czudaj, 2019). This is particularly relevant when returns on reserve currencies are low, a scenario prevalent in recent years.

A hedge against inflation: Inflation presents a significant challenge for central banks, as it erodes the purchasing power of a nation’s currency. Gold has been a long-standing consideration for central banks as a potential inflation hedge. Its price often exhibits an inverse relationship with the value of the US dollar, meaning it tends to appreciate as the dollar depreciates. This phenomenon can be attributed to two primary factors: (1) increased demand during inflationary periods; and (2) gold tends to have intrinsic value unlike currencies (Stonex Bullion, 2024).

Diversification of portfolio: Diversification is a cornerstone principle of portfolio management. It involves allocating investments across various asset classes to mitigate risk. Gold, with its negative correlation to traditional assets like stocks and bonds, can be a valuable tool for portfolio diversification. In simpler terms, when stock prices decline, gold prices often move in the opposite direction, offering a potential hedge against market downturns (see Figure 5).

Figure 5. How Gold Performs During Recession, 1970-2022.

Source: Bhutada (2022).

Hedge against geopolitical risks: de Besten, Di Casola and Habib (2023) suggest that geopolitical factors may have influenced gold acquisitions for some central banks in 2022. A positive correlation appears to exist between changes in a country’s gold reserves and its geopolitical proximity to China and Russia (compared to the U.S.) for countries actively acquiring gold reserves. This pattern is particularly evident in Belarus and some Central Asian economies, suggesting they may have increased their gold holdings based on geopolitical considerations.

Low or Negative Interest Rates: When interest rates on major reserve currencies like the US dollar are low or negative, it reduces the opportunity cost of holding gold (gold is a passive asset that does not generate periodic income, dividends, and interest benefits). In other words, gold becomes a more attractive option compared to traditional investments that offer minimal or no returns. The prevailing low-interest rate environment, particularly for major reserve currencies like the US dollar, has diminished the opportunity cost of holding gold.

This phenomenon applies to both advanced economies and emerging market economies (EMDEs). Notably, EMDEs with significant dollar-denominated debt are particularly sensitive to fluctuations in US interest rates. Arslanalp, Eichengreen, and Simpson-Bell (2023) conclude that reserve managers are increasingly incorporating gold into their portfolios when returns on reserve currencies are low. Figure 6 illustrates the inverse relationship between the price of gold and the inflation-adjusted 10-year yield.

Figure 6. Gold Price and Inflation-Adjusted 10-Year Yield.

Source: Bloomberg, U.S. Global Investors.

In addition to its aforementioned advantages, gold offers central banks a long-term investment opportunity despite its lack of interest payments, unlike traditional securities. While gold exhibits short-term price volatility, its historical price trend suggests a long-term upward trajectory (see Figure 7).

Figure 7. Gold Price per Troy Ounce (approximately 31.1 grams), in USD.

Source: World Gold Council.

Gold as a Safeguard Against Sanctions

Gold is perceived as a secure and desirable reserve asset in situations where countries face financial sanctions or the risk of asset freezes and seizures (see Table 1). The decision by G7 countries to freeze the foreign exchange reserves of the Bank of Russia in 2022 highlighted the importance of holding reserves in a form less vulnerable to sanctions. Following Russia’s annexation of Crimea in 2014, the Bank of Russia intensified its gold purchases. By 2021, it had confirmed that its gold reserves were fully vaulted domestically. The imposition of sanctions on Russia, which restrict banks from engaging in most transactions with Russian counterparts and limit the Bank of Russia’s access to international financial markets, further underscores the appeal of gold as a safeguard.

While the recent sanctions imposed by G7 countries, which limit Russian banks from conducting most business with their counterparts and restrict the Bank of Russia from accessing its reserves in foreign banks, are an extreme example, similar sanctions have previously impacted or threatened financial operations of other nations’ central banks and governments. This situation raises the question of whether the risk of sanctions has influenced the observed trend of countries’ increasing their gold reserves (IMF, International Financial Statistics, 2022).

Table 1. Top 10 Annual Increases in the Share of Gold in Reserves, 2000-2021.

Source: IMF, International Financial Statistics; Global Sanctions Database (GSDB). Note: Excludes countries with central bank gold purchases from domestic producers.

As outlined in Arslanalp, Eichengreen and Simpson-Bell (2023), there were eight active diversifiers into gold in 2021, each purchasing at least 1 million troy ounces (Kazakhstan, Belarus, Turkey, Uzbekistan, Hungary, Iraq, Argentina, Qatar), exhibiting distinct international economic or political concerns. Kazakhstan, Belarus, and Uzbekistan maintain ties with Russia through the Eurasian Economic Union. Turkey has faced sanctions from both the European Union and the U.S. Iraq has experienced disputes with the U.S., while Hungary has faced similar issues with the European Union. In 2017-21, Qatar was subjected to a travel and economic embargo by Saudi Arabia and neighboring countries. Argentina may have had concerns about asset seizures by foreign courts due to sovereign debt disputes.

Furthermore, according to the Economist (2022), gold is costly to transport, store, and protect. It is expensive to use in transactions and doesn’t earn interest. However, it can be lent out like currencies in a central bank’s reserves. When lent out or used in swaps (where gold is exchanged for currency at agreed dates), it can generate returns. But banks prefer gold to be stored in specific places like the Bank of England or the Federal Reserve Bank of New York, which brings back the risk of sanctions. For instance, During the Iranian Revolution in 1979 and the subsequent hostage crisis, the United States froze Iranian assets, including the gold reserves held in U.S. banks (Arslanalp, Eichengreen  and Simpson-Bell, 2023). The National Bank of Georgia intends to transport its acquired gold from England to Georgia for storage, which could potentially reduce storage costs, but further decrease liquidity.

Arslanalp, Eichengreen, and Simpson-Bell (2023) conclude that since the early 2000s, half of the significant year-over-year increases in central bank gold reserves can be attributed to the threat of sanctions. By examining an indicator that tracks financial sanctions by major economies like the United States, United Kingdom, European Union, and Japan, all key issuers of reserve currencies, the authors have confirmed a positive correlation between such sanctions and the proportion of reserves held in gold. Furthermore, their findings suggest that multilateral sanctions imposed by these countries collectively have a more pronounced effect on increasing gold reserves than unilateral sanctions. This is likely because unilateral sanctions allow room for shifting reserves into the currencies of other non-sanctioning nations, whereas multilateral sanctions increase the risks associated with holding foreign exchange reserves, thus making gold a more attractive option.

The NBG’s Historic Decision

The National Bank of Georgia’s (NBG) recent acquisition of gold for its reserves is likely motivated by a desire to diversify its portfolio and hedge against inflation and geopolitical risks. However, recent developments in Georgia raise questions about the timing of this policy decision, bringing political considerations into the picture.

Among these developments is the 2023 suspension of the IMF program for Georgia, due to concerns about the NBG’s governance (Intellinews, 2023). The amendments to the NBG law in June 2023, which created a new First Deputy and Acting Governor position – superseding the existing succession framework – contradicted IMF Safeguards recommendations and raised concerns about increased political influence (International Monetary Fund, 2024). How the recent gold purchase reflect on the future of IMF cooperation is thus a relevant question to ask.

Another ground for concern is the recent approval by the Georgian Parliament of the anti-democratic “Foreign Influence Transparency” law and the anti-Western rhetoric of the ruling party, which have sparked intensive public protests. European partners warn that the law will not align with Georgia’s European Union aspirations and that it could potentially hinder the country’s advancement on the EU pathway. Rather, the law might distance Georgia from the EU. This law has also increased the concerns for further sanctions on members of the ruling party, government officials, and individuals engaging in anti-West and anti-EU propaganda.

Furthermore, the recent amendment of the Tax Code, the so-called “offshores law” allows for tax-free funds transfers from offshore zones to Georgia. This, combined with other developments, raises questions about whether the government is preparing for potential sanctions, should its relationship with Russia continue to strengthen.

Conclusion

In conclusion, this policy brief highlights that central banks’ acquisition of gold reserves, especially in emerging economies, is motivated by a combination of economic and political factors. The economic incentives include the need for portfolio diversification and protection against inflation and geopolitical instabilities, a trend that became more pronounced following the 2008 global financial crisis. Politically, the accumulation of gold serves as a strategic move to lessen dependency on the U.S. dollar and as a defensive measure against potential international sanctions, as highlighted by the post-2014 geopolitical shifts following Russia’s annexation of Crimea.

In 2024, Georgia purchased gold for the first time since regaining its independence. While its gold purchasing strategy seems to align with these economic motives, the recent domestic political dynamics suggest a deeper, possibly strategic political rationale by the National Bank of Georgia. The imposition of U.S. sanctions on key figures, and recent legislative actions deviating from European Union standards, all amidst increasing anti-Western sentiment, indicate that the NBG’s gold acquisitions might also be driven by a quest for greater safeguard against potential future sanctions. Thus, while economic reasons for the purchase are significant, the political underpinnings in the NBG’s recent actions raise numerous unanswered questions.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

 

Operating and Financial Hedging: Evidence from Trade

Posted on April 12, 2017 | Policy Brief

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There is a large and growing literature that has modeled how real policies affect and interact with financial policies. It is important to consider such an interaction since a firm, just as a single value-maximizing agent, should make its strategic decisions optimally, taking into account all of its multi-dimensional facets (contracts with employees and suppliers, situation with market competitors, innovation, foreign-market operations and others – on the real side, and capital structure, dividend policy, IPO, hedging behavior – on the financial side). This policy brief introduces a new type of hedging exchange-rate risks through matching currencies of export revenues and import costs, and shows how it substitutes out financial hedging using currency derivatives.

Exchange-rate exposure and financial hedging around the world

Many firms are exposed to exchange-rate fluctuations in one way or the other. Because volatility is typically considered to be bad for a firm – either because small firms are risk-averse or because it may reduce the value of a risk-neutral firm through costly distress or agency costs – firms attempt to hedge it. Indeed many successfully do so. Bartram et al. (2009) report that about 60% of non-financial firms around the world use financial derivatives (forwards, futures, swaps, etc.), with the most popular type being currency derivatives (44%). These large numbers indicate the importance of risk management in general and hedging exchange-rate shocks in particular. There is also a considerable heterogeneity across countries. According to their investigation based on a subsample of world firms, currency derivative usage ranges from 6% in China and 15% in Malaysia, to 37% in the United States and 48% across Europe, to 80% in New Zealand and 88% in South Africa.

There is also some cross-sectional variation across firms. Geczy et al. (1997) report that among U.S. firms those with greater growth opportunities, tighter financial constraints, extensive foreign exchange-rate exposure and economies of scale in hedging activities are more likely to use currency derivatives.

Operational hedging

So what are potential alternatives to hedging exchange-rate exposure through currency derivatives? The literature has suggested other ways of reducing such cash-flow volatility – through operational hedges. The examples include diversifying the company’s operations and production geographically (as in Allayannis et al., 2001). The authors provide an example of Schering-Plough (a United States-based pharmaceutical company) that in their 1995 annual report suggested that hedging using financial instruments was not considered cost-effective, since the company operated in many foreign countries where the currencies would not generally move in parallel. More recent studies (e.g. Kim et al., 2006; Hankins, 2011) also support the geographical diversification of production and acquisition of foreign subsidiaries as important channels of operational hedging, and as such they can act as substitutes for financial hedging.

These papers are also part of the larger literature on the interrelations between real and financial strategies, and in particular the literature that has modeled how real policies, aimed at lowering operational risks (or alternatively increasing operating flexibility), reflect in various financial decisions (such as e.g. capital structure). Examples of such policies include the use of flexible manufacturing systems that allow changing the level of output, the product mix, or the operating “mode” (as in Brennan and Schwartz, 1985; He and Pindyck, 1992; and Kulatilaka and Trigeorgis, 2004); employing a contingent workforce (e.g. part-time and seasonal labor, as in Hanka, 1998 or workers on temporary contracts, as in Kuzmina, 2014); adopting a defined contribution, rather than a defined benefit or pension plan (as in Petersen, 1994); and many others.

Trade-related operational hedges

In Kuzmina and Kuznetsova (2016), we explore a different type of operational hedging – the one arising from exporting final goods and importing intermediate inputs from abroad at the same time. As previous literature has suggested, firms that export their final goods are naturally more exposed to exchange-rate risks due to their foreign-denominated contract obligations that have to be translated into domestic currency when the transaction clears in the future, the so-called transaction exposure of companies (Glaum, 2005). As long as volatility is costly for firms, higher exchange-rate exposure leads to more financial hedging, so previous papers indeed find a positive correlation between exporting and currency hedging (e.g. Geczy et al., 1997; He and Ng, 1998; Allayannis and Ofek, 2001).

This argument would similarly apply to firms that import their intermediate inputs from abroad, since they are similarly exposed to exchange-rate fluctuations on the cost side. In our paper, we attempt to provide new evidence on these channels, as well as to introduce a novel explanation to why not all firms hedge using financial derivatives. We show that firms that export and import at the same time hedge less using currency derivatives, and especially when volatility of exchange rate is high.  We argue that when firms both export and import at the same time, their net foreign-denominated position (and thus exchange-rate exposure) becomes lower on average, and hence there is less incentive to hedge against it. This is consistent with foreign-currency matching of costs and revenues, which is a phenomenon also observable in other data. Although in our data we cannot observe currency of individual transactions for each firm, we do so in another project based on the data from Russia. Our calculations for Russian data, based on the whole universe of import and export declarations, suggest that for the major currencies, the probability of importing in the same currency is higher than in any other currency when a firm also exports in this currency. For example, out of all firms that have exports in Euro and some imports, 82% would import in Euro. The similar number for the U.S. dollar is 71%. Such trade-related operational hedge may arise naturally for firms in the global world, thus reducing their need to use financial instruments.

Germany as an interesting laboratory

To test our hypotheses, we use hand-collected data on a sample of German public firms during 2011-2014. Germany is a particularly relevant country for testing our hypotheses for at least three reasons.

First of all, it is the world’s third largest exporter and importer and the top one in Europe. Second and most importantly, if we want to explore currency risk arising from exporting and importing, at least some (and preferably many) of the export and import transactions have to occur in a foreign currency. This means that, for example, looking at the U.S. data would not give us a lot of power in identifying our mechanism, since according to Goldberg and Tille (2008), only 5% of all U.S. export contracts are set in a currency other than the U.S. dollar. On the other hand, more than half of German exports and imports outside the euro area are denominated in a currency other than the Euro, and in particular about 30-40% of all contracts are set in U.S. dollars.  This means that our measured shares of non-euro zone exports and imports will actually have a large component of non-euro-denominated contracts, and we will have more power to measure the actual exchange-rate exposure arising from exporting and importing. Finally, we analyze the largest companies in Germany – those that trade on the Prime Standard segment of the Frankfurt Stock Exchange, since they have to disclose their use of derivatives due to the highest accounting and transparency requirements of this listing. These mandatory disclosure rules enable us to collect the data on hedging from companies’ annual reports and perform the analysis.

Identification strategy and results

To start the analysis, we provide some cross-sectional correlations. We find that firms in industries with more out-of-euro-zone exporting (importing) have a higher propensity to hedge using currency derivatives. In particular, a firm in an industry with 10pp higher export (import) shares has on average a 10.5pp (28.9pp) higher probability of currency hedging.

Although many industries simultaneously export and import a lot, others have a substantial imbalance in terms of export and import shares. We are therefore interested in whether this translates into different hedging behaviors. By adding the interaction between export and import shares in our regression specifications, we find that firms that simultaneously export and import hedge less than firms that just export or import. This is consistent with our hypothesis that firms decrease their effective exchange-rate exposure by having both revenues and costs in foreign currency and implies that operational hedging through matched currencies is a substitute for financial hedging.

In order to strengthen the result, we complement our cross-sectional correlations with a difference-in-differences methodology. To do this, we compare firms in industries with higher and lower out-of-euro-zone export and import shares during times of higher and lower exchange-rate volatility. We find that the higher the exchange-rate volatility, the larger this substitution effect is. This finding is stronger than a simple cross-sectional correlation between exporting, importing and hedging (which can be driven by omitted factors), since it uses an arguably exogenous volatility shock to show that operational hedging substitutes for financial hedging precisely during times when firms have highest incentives to hedge. The results are robust to using a set of control variables and firm and year fixed effects.

Implications

From an applied perspective, the interrelation between operational and financial strategies of the firm suggests that the decisions of the CEO and CFO should be complementary to each other to achieve the value-maximization goal of the firm. From a policy perspective, they imply that exogenous changes in government policies aimed at certain organizational changes in the firm (e.g. export promotion policies) could have indirect consequences for their riskiness and financing decisions.

References

  • Allayannis, G., J. Ihrig, and J. P. Weston (2001), “Exchange-rate hedging: Financial versus operational strategies”. American Economic Review 91 (2), 391-395.
  • Allayannis, G. and E. Ofek (2001), “Exchange rate exposure, hedging, and the use of foreign currency derivatives”, Journal of International Money and Finance 20 (2), 273-296.
  • Bartram, S. M., G. W. Brown, and F. R. Fehle (2009), “International evidence on financial derivatives usage”, Financial Management 38 (1), 185-206.
  • Brennan, M. and E. S. Schwartz (1985), “Evaluating natural resource investments”, The Journal of Business 58 (2), 135-157.
  • Geczy, C., B. A. Minton, and C. Schrand (1997), “Why firms use currency derivatives”, Journal of Finance 52 (4), 1323-1354.
  • Glaum, M. (2005), “Foreign-Exchange-Risk Management in German Non-Financial Corporations: An Empirical Analysis”, Springer.
  • Hanka, G. (1998), “Debt and the terms of employment”, Journal of Financial Economics 48 (3), 245-282.
  • Hankins, K. W. (2011), “How do financial firms manage risk? Unraveling the interaction of financial and operational hedging”, Management Science 57 (12), 2197-2212.
  • He, H. and R. S. Pindyck (1992), “Investments in flexible production capacity”, Journal of Economic Dynamics and Control 16 (3-4), 575-599.
  • He, J. and L. K. Ng (1998), “The foreign exchange exposure of Japanese multinational corporations”, Journal of Finance 53 (2), 733-753.
  • Kim, Y. S., I. Mathur, and N. Jouahn (2006), “Is operational hedging a substitute for or a complement to financial hedging?” Journal of Corporate Finance 12 (4), 834-853.
  • Kulatilaka, N. and L. Trigeorgis (2004), “The general flexibility to switch: Real options revisited”, Real options and investment under uncertainty: classical readings and recent contributions, 179-198.
  • Kuzmina, O. (2014), “Operating flexibility and capital structure: Evidence from a natural experiment”, American Finance Association Conference, Philadelphia.
  • Kuzmina O. and O. Kuznetsova (2016), “Operating and Financial Hedging: Evidence from Trade”, CEFIR Working paper.

Petersen, M. (1994), “Cash flow variability and a firm’s pension choice: A role for operating leverage”, Journal of Financial Economics 36, 361-383.