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

40 Pages Posted: 7 Nov 2008  

George Allayannis

University of Virginia - Darden School of Business

Eli Ofek

New York University (NYU) - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: July 1997

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.

Keywords: Risk management, Multinationals, Corporate policies, Foreign trade

Suggested Citation

Allayannis, George and Ofek, Eli, Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives (July 1997). NYU Working Paper No. FIN-98-002. Available at SSRN: https://ssrn.com/abstract=1296392

George Allayannis (Contact Author)

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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