From Carry Trades to Trade Credit : Financial Intermediation by Nonfinancial Corporations

We use unique firm level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency and lending in domestic currency, largely to related partners (trade credit), accumulating currency risk in the process. The interest rate differential between local and foreign currency borrowing induces this behavior at a quarterly frequency, generating an expansion in foreign currency borrowing and FX mismatch, gross trade credit and sales. Firms that were active in carry-trades have comparatively decreased investment and profits following a large depreciation, but maintain their supply of trade credit