An empirical analysis of corporate currency risk management policies and practices

Using a unique and extremely granular data set of complete currency spot and derivatives positions for 101 large non-financial corporations, we compare the stated currency risk management policies with the actual strategies executed by these companies. Our integrative analysis draws from the three principal sources of information that exist about firms: market prices, financial statements, and what firms say about themselves. We first identify a notable discord between the policies and their practices of firms. We next find that these companies engage in a high degree of currency speculation that seems to be driven by market movements with the results strongest for the heaviest derivatives users. Finally, we show that these companies attempt to time the market even when they are engaged in hedging. We find that the actions of companies differ from their words more often when they have a greater amount of debt, particularly foreign currency debt, and a lower level of managerial ownership. In general, we find that corporate risk management is highly speculative and more often than not disagrees with stated company policies.