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