Empirical evidence on the incentives to hedge transaction and translation exposure
AbstractWe investigate Swedish firms’ use of financial hedges to reduce their foreign exchange exposure for 1997–2001. The study uses survey data, which enables us to differentiate between hedging aimed at translation exposure and transaction exposure, respectively. The survey responses show that more than 50% of the firms employ financial hedges and that transaction exposure is more frequently hedged than translation exposure. We find that the likelihood of using financial hedges is increasing with firm size and exposure and that liquidity constraints are important in explaining transaction exposure hedging. Importantly, we find that the existence of loan covenants explains translation exposure hedging. This suggests that firms hedge translation exposure in order to prevent costly violations of loan covenants.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0407020.
Length: 27 pages
Date of creation: 28 Jul 2004
Date of revision:
Note: Type of Document - pdf; pages: 27
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Risk management; hedging; foreign exchange exposure; transaction exposure; translation exposure; loan covenants; bond covenants;
Find related papers by JEL classification:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G39 - Financial Economics - - Corporate Finance and Governance - - - Other
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