Firms, currency hedging, and financial derivatives

The use of foreign currency is prevalent in international markets. Firms in international trade and capital markets must decide how to cope with foreign currency risk associated with buying inputs and selling output abroad, how to define its financing, and how optimally allocate international assets. This chapter overviews the emerging literature exploiting new granular data sets and analyzing the use of FX derivatives and currency risk management, which are both shaped by the existence of financial frictions.