Poor Descartes, imagining that everything on which he had built his life was coming under doubt. Every footing that he had held as solid foundation on which to base thought and decision was disintegrating. It may seem hard to relate to that, but maybe I do have experience that can, in a small way, reflect his. Of course, he had to deal with impending torture of the body and damnation of the soul if his thought did not meet with approval from his audience.
Descartes was attempting to find a solid basis for knowledge by supposing that everything he had learned, or was able to observe through his senses, was doubtful. As he descended further and further into this progressive, methodological doubt he rejected layer after layer that which he had previously held to be true. Eventually, he remained sure of one thing, the famous phrase, cogito ergo sum, I think therefore I am. In his Meditations (Descartes, 1641/1901), he came out of his doubt by ascribing the only possible proof of knowledge to mathematics, and the reduction of any problem to its smallest possible piece. His meditations also sought to prove the existence of God through this process; if he had not, he would have had to face the Inquisition and excommunication that in those times insinuated his eternal damnation.
Congress recently passed what it perceived as long overdue reform to the federal consumer bankruptcy laws. The overarching theme of these amendments is increased responsibility of debtors to pay back their debts. Congress went tough on debtors, and it is believed this crack-down will stem the burgeoning number of personal bankruptcy filings in this country.
Many scholars have opined that these new laws were ill conceived. One common complaint is that they are overly cumbersome and will drive up the expense of the consumer bankruptcy system enormously for all participants. Compulsory court filings, documentations, calculations, and certifications add much to the cost of a “means test” system for everyone a means test that many concede will catch only a few miscreants. That is a sound critique of the law, but it is widely shared.
The empirical literature on the use of foreign currency debt by non-financial firms follows two somewhat related paths. The first strand of literature investigates why firms use or issue foreign currency debt (Allayannis and Ofek (2001), Keloharju and Niskanen (2001), Kedia and Mozumdar (2002)). This literature finds strong support for the use of foreign debt as a hedge for foreign currency exposure. There is also some support for the firms’ choice of currency of debt being influenced by differences in the cost of debt in different currencies due to capital market imperfections (Keloharju and Niskanen (2001) and Kedia and Mozumdar (2002)).
The second strand of this literature examines whether foreign debt and foreign currency derivatives are used as substitutes or complements when hedging foreign currency exposure (Géczy, Minton and Schrand (1997), Allayannis and Ofek (2001), Elliot, Huffman and Makar (2003)). In this literature there is support for the notion that foreign debt acts as a substitute for foreign currency derivatives but there is also evidence which shows that the type or source of exposure might influence the choice of hedging strategy (Allayannis and Ofek (2001). This paper examines a firm’s decision on the choice of foreign currency hedging method, comparing foreign currency derivatives and foreign debt, in order to determine whether they are seen as substitutes or complements. In examining whether foreign currency derivatives substitute for or complement foreign debt this paper identifies firm characteristics that have not been previously considered and is the first paper to investigate this issue using non-US data.
