Corporate earnings sensitivity to FX volatility and currency exposure: evidence from Peru

Using firm-level information on currency risk positions, the effects of nominal foreign exchange shocks on non-financial corporate returns are assessed through a balanced-panel data approach. Depreciation shocks directly affect firms that have net short positions in foreign currency by decreasing their net asset valuation at higher exchange rates. Total earnings sensitivity to these pressures would depend on both the magnitude of the shocks (usually non-linear) and the extent of a firm's hedging strategy. The response from individual firms varies from adjusting their exposure through spot market operations to implementing derivative-hedging strategies. Indeed, an effective hedging policy might reduce significantly profit-loss sensitivity to currency volatility. Other enterprises just absorb currency losses considering shocks to be transitory or because core-business profits are large enough to overcome those losses. Interestingly, a significant depreciation episode does not necessarily induce non-user firms to start hedging through financial derivatives.