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Foreign Currency Derivatives versus Foreign Currency Debt and the Hedging Premium

47 Pages Posted: 17 Oct 2007 Last revised: 13 May 2016

Ephraim Clark

Middlesex University Business School

Amrit Judge

Middlesex University - Business School

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Abstract

This paper compares the effect on firm value of different foreign currency (FC) financial hedging strategies identified by type of exposure (short or long term) and type of instrument (forwards, options, swaps and foreign currency debt). We find that hedging instruments depend on the type of exposure. Short term instruments such as FC forwards and/or options are used to hedge short term exposure generated from export activity while FC debt and FC swaps into foreign currency (but not into domestic currency) are used to hedge long term exposure arising from assets located in foreign locations. Our results relating to the value effects of foreign currency hedging indicate that foreign currency derivatives use increases firm value but there is no hedging premium associated with foreign currency debt hedging, except when combined with foreign currency derivatives. Taken individually, FC swaps generate more value than short term derivatives.

Keywords: International Finance, Risk Management, Foreign Currency Hedging, Foreign Currency Derivatives, Foreign Currency Debt, Foreign Currency Swaps.

JEL Classification: G15, G30, G32

Suggested Citation

Clark, Ephraim and Judge, Amrit, Foreign Currency Derivatives versus Foreign Currency Debt and the Hedging Premium. European Financial Management Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1022278

Ephraim Clark

Middlesex University Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

Amrit Judge (Contact Author)

Middlesex University - Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom
020 8411 6344 (Phone)
020 8411 4739 (Fax)

HOME PAGE: http://mubs.mdx.ac.uk/Staff/Personal_pages/Amrit1/index.htm

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