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Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives

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  • George Allayannis
  • Eli Ofek

Abstract

We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using the sample of all S&P 500 nonfinancial firms for 1993, we find strong evidence that firms use foreign currency derivatives for hedging; the use of derivatives significantly reduces the exchange-rate risk firms face. We also find that the decision to use derivatives depends on exposure factors (i.e. foreign sales and foreign trade) and on variables largely associated with theories of optimal hedging (i.e., size and R&D expenditures), and that the level of derivatives used depends only on a firm's exposure through foreign sales and trade.

Suggested Citation

  • George Allayannis & Eli Ofek, 1997. "Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-002, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:98-002
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    Cited by:

    1. Ezeanyeji Clement I. & Onwuteaka Ifeoma. C., 2016. "Determinants of Exchange Rate Sensitivity on the Nigerian Manufacturing Sector," Economy, Asian Online Journal Publishing Group, vol. 3(1), pages 40-50.
    2. Goswami, Gautam & Shrikhande, Milind M., 2001. "Economic exposure and debt financing choice," Journal of Multinational Financial Management, Elsevier, vol. 11(1), pages 39-58, February.
    3. Nevi Danila & Chia-Hsing Huang, 2016. "The determinants of exchange rate risk management in developing countries: evidence from Indonesia," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 6(1), pages 53-67.
    4. Nucci, F. & Pozzolo, A.F., 1998. "Investment and the Exchange Rate," Papers 344, Banca Italia - Servizio di Studi.
    5. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.

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