Foreign Currency Invoicing of Domestic Transactions as a Hedging Strategy: Theory and Evidence for Uruguay

Produced by: 
Banco Central del Uruguay
Available from: 
April 2017
Paper author(s): 
Gerardo Licandro Ferrando
Miguel Mello Costa
Topic: 
Financial Economics
Year: 
2018

In this paper we study the factors associated to the use of the US Dollar for the invoicing of domestic transactions, as a common practice of Uruguayan firms. We first build a basic model to understand the role that foreign currency invoicing might have as a financial hedging strategy in the case of a firm that exports in foreign currency, has imported imports and has both assets and liabilities in domestic and foreign currency. We show that risk averse firms might use their flows position in order to hedge currency mismatches in their stocks. Domestic invoicing of transactions is more likely the larger are negative financial positions of firms, the bigger the share of imported inputs and the smaller the share of exports. We then estimate several models for the fraction of domestic sales invoiced in foreign currency and find evidence that supports the intuition of the model.

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