Operational and Financial Hedging: Evidence from Export and Import Behavior

We use hand-collected data on a sample of German public firms during 2011-2014 to show that firms use currency derivatives more often when they export or import, and especially when exchange-rate fluctuations are larger, but to a lesser extent when having high export and import shares simultaneously. We interpret this finding as evidence of operational hedging that arises as foreign-denominated revenues and costs match, and substitutes for financial hedging. Our identification strategy uses both cross-sectional heterogeneity in exchange-rate exposures and time-series variation in exchange-rate fluctuations. We highlight the importance of examining operating strategies as integral determinants of corporate financing policies.