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A new look at hedging with derivatives: Will firms reduce market risk exposure?

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  • Turan G. Bali
  • Susan R. Hume
  • Terrence F. Martell

Abstract

This study examines derivatives use of foreign exchange, interest rate, and commodities risk by nonfinancial firms across multiple industries, using data from 1995 to 2001. This work considers the interaction of a firm's risk exposures, derivatives use, and real operations simultaneously, and considers how these factors change over time using a consistent database. Hedging with derivatives is only signi.cantly related to commodity risk exposure during most years of the study, and to a more limited degree to interest rate exposure. Further, a strong correlation was found between risk exposures for some years using a new technique, suggesting that univariate modeling is not always appropriate. The implications are that hedging with derivatives is not always important to a firm's rate of return and is linked to other nonfinancial and economic factors. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27: 1053–1083, 2007

Suggested Citation

  • Turan G. Bali & Susan R. Hume & Terrence F. Martell, 2007. "A new look at hedging with derivatives: Will firms reduce market risk exposure?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(11), pages 1053-1083, November.
    • Handle: RePEc:wly:jfutmk:v:27:y:2007:i:11:p:1053-1083
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    Cited by:

    1. Ekta Sikarwar & Roopak Gupta, 2019. "Economic exposure to exchange rate risk and financial hedging," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(4), pages 965-984, August.
    2. Sung C. Bae & Hyeon Sook Kim & Taek Ho Kwon, 2018. "Currency derivatives for hedging: New evidence on determinants, firm risk, and performance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(4), pages 446-467, April.
    3. Liu, Hui-Hsuan & Chang, Ariana & Shiu, Yung-Ming, 2020. "Interest rate derivatives and risk exposure: Evidence from the life insurance industry," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Hong V. Nguyen, 2018. "Hedging and hedging effectiveness under required disclosures: a study of the impact of derivatives use on capital investment," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 471-491, July.

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