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Why firms hedge with currency derivatives: an examination of transaction and translation exposure


  • Niclas Hagelin


This article examines Swedish firms' use of currency derivatives to provide empirical evidence on the determinants of firms' hedging decisions. The study uses survey data in combination with publicly available data.The use of survey data makes it possible to differentiate between currency derivative usage aimed at hedging translation exposure and that aimed at hedging transaction exposure. This is of interest since translation exposure and transaction exposure tend to affect firms differently. The results are consistent with the conjecture that firms hedge transaction exposure with currency derivatives to increase firm value by reducing indirect costs of financial distress or alleviating the underinvestment problem. No evidence is found to support the notion that translation exposure hedges are used to increase firm value.

Suggested Citation

  • Niclas Hagelin, 2003. "Why firms hedge with currency derivatives: an examination of transaction and translation exposure," Applied Financial Economics, Taylor & Francis Journals, vol. 13(1), pages 55-69.
  • Handle: RePEc:taf:apfiec:v:13:y:2003:i:1:p:55-69 DOI: 10.1080/09603100110094501

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    References listed on IDEAS

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    Cited by:

    1. Niclas Hagelin & Bengt Pramborg, 2004. "Empirical evidence on the incentives to hedge transaction and translation exposure," Finance 0407020, EconWPA.
    2. Donald Lien & Fathali Firoozi, 2008. "Offshore Bidding and Currency Futures," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 7(2), pages 125-136, August.
    3. Hagelin, Niclas & Pramborg, Bengt, 2006. "Empirical evidence concerning incentives to hedge transaction and translation exposures," Journal of Multinational Financial Management, Elsevier, vol. 16(2), pages 142-159, April.
    4. Pramborg, Bengt, 2004. "Derivatives hedging, geographical diversification, and firm market value," Journal of Multinational Financial Management, Elsevier, vol. 14(2), pages 117-133, April.
    5. Hoa Nguyen & Robert Faff, 2010. "Are firms hedging or speculating? The relationship between financial derivatives and firm risk," Applied Financial Economics, Taylor & Francis Journals, vol. 20(10), pages 827-843.
    6. Fabling, Richard & Grimes, Arthur, 2008. "Do Exporters Cut the Hedge? Who Hedges, When and Why?," Occasional Papers 08/2, Ministry of Economic Development, New Zealand.
    7. Zeidan, Rodrigo & Müllner, Jakob, 2015. "Firm, market and top management antecedents of speculation: Lessons for corporate governance," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 42-58.
    8. Libo Yin & Liyan Han, 2015. "Hedging International Foreign Exchange Risks via Option Based Portfolio Insurance," Computational Economics, Springer;Society for Computational Economics, vol. 45(1), pages 151-181, January.
    9. Pramborg, Bengt, 2005. "Foreign exchange risk management by Swedish and Korean nonfinancial firms: A comparative survey," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 343-366, June.
    10. Jorge A Chan-Lau, 2005. "Hedging Foreign Exchange Risk in Chile; Markets and Instruments," IMF Working Papers 05/37, International Monetary Fund.
    11. Hagelin, Niclas & Pramborg, Bengt, 2005. "Foreign exchange exposure, risk management, and quarterly earnings announcements," Journal of Multinational Financial Management, Elsevier, vol. 15(1), pages 15-30, February.
    12. Björn Döhring, 2008. "Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective," European Economy - Economic Papers 2008 - 2015 299, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Anderson, Brian P. & Makar, Stephen D. & Huffman, Stephen H., 2004. "Exchange rate exposure and foreign exchange derivatives: do ineffective hedgers modify future derivatives use?," Research in International Business and Finance, Elsevier, vol. 18(2), pages 205-216, June.
    14. Belghitar, Yacine & Clark, Ephraim & Mefteh, Salma, 2013. "Foreign currency derivative use and shareholder value," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 283-293.
    15. Doyeon Kim & Taeyoon Sung, 2007. "Does the Market Evaluate Firm`s FX Risk Management? -Evidence from the Korean Stock Market-," Korean Economic Review, Korean Economic Association, vol. 23, pages 243-266.
    16. Kim, Woochan & Sung, Taeyoon, 2005. "What makes firms manage FX risk?," Emerging Markets Review, Elsevier, vol. 6(3), pages 263-288, September.

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