Lending relationships and access to currency hedging: Evidence from Brazil

Firms’ currency exposure can lead to financial distress and macroeconomic instability. Over-the-counter (OTC) derivatives provided by financial institutions are the primary risk management tool for nonfinancial firms. However, the role of financial institutions in providing these derivatives remains underexplored in the literature. Using novel loan and derivatives microdata, we examine how lending relationships influence access to foreign exchange (FX) OTC derivatives. We find that firms are more likely to trade derivatives with their lending relationship banks than with other banks, with a stronger preference for their main lender. These effects are more pronounced for small firms and first-time derivatives users, highlighting how lending relationships reduce informational and search costs, thereby facilitating access to hedging. Additionally, derivatives prices are lower when traded with the firms’ main lender and lenders providing loans in foreign currency, indicating that banks encourage hedging to reduce risks in their loan portfolios.