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

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

George Allayannis 

University of Virginia - Darden School of Business

Eli Ofek 

New York University (NYU) - Department of Finance
July 1997

NYU Working Paper No. FIN-98-002 
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.