How Much do Firms Hedge with Derivatives?
Wayne R. Guay
University of Pennsylvania - Accounting Department
Massachusetts Institute of Technology (MIT) - Sloan School of Management
AFA 2002 Atlanta Meetings
Previous research offers little large-sample evidence on the magnitude of non-financial firms' risk exposure hedged by financial derivatives. Among 234 large non-financial derivatives users, if the median firm simultaneously experiences a three standard deviation change in interest rates, currency exchange rates, and commodity prices, its entire derivatives portfolio will generate, at most, $15 million in current cash flow and will rise in value by $31 million. These amounts are modest relative to firm size, operating cash flows, investing cash flows and other firm benchmarks. The findings indicate corporate derivatives use is a small piece of non-financial firms' overall risk profile, and suggest the need to rethink some empirical research documenting the economic importance of firms' derivative use.
Number of Pages in PDF File: 58
Keywords: derivatives, hedging, risk management, risk exposure
JEL Classification: G30, G24, M41working papers series
Date posted: March 27, 2001
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