Table of Contents
ISRN Economics
Volume 2012, Article ID 658982, 4 pages
http://dx.doi.org/10.5402/2012/658982
Research Article

The Information Content in Bank Currency Mismatches in Fixed Exchange Rate Regimes

Department of Economics, Université du Québec à Montréal, P.O. Box 8888, Station A, Montreal, Quebec, QC, Canada H3C 3P8

Received 11 May 2012; Accepted 20 June 2012

Academic Editors: D. M. Hanink and M. T. Leung

Copyright © 2012 Victoria Miller. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Banks tend to leave their currency exposures uncovered in fixed and “intermediate” exchange rate regimes. The paper asks why this is the case. There are three possible explanations: First, hedges are costly and the currency peg is credible; Second, financial markets are incomplete and so hedging instruments are unavailable; or third, hedges are costly and banks expect a bailout should currency gyrations threaten their solvency. The paper demonstrates that the third argument is not time consistent and therefore that uncovered currency exposures reflect currency peg credibility or financial incompleteness and not moral-hazard risk taking.