How Much do Firms Hedge with Derivatives?

52 Pages Posted: 13 Dec 2000  

Wayne R. Guay

University of Pennsylvania - Accounting Department

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: March 2001

Abstract

If a firm's derivative positions generate positive cash flows or value in periods of economic adversity, then those derivatives are deemed to hedge the firm's risk. Previous research offers little large-sample evidence on the magnitude of non-financial firms' risk exposure hedged by the financial derivatives. In a sample of 234 large corporations that use derivatives, we find that if the median firm simultaneously experiences a three standard deviation change in interest rates, currency exchange rates, and commodity prices, it will collect $15 million of cash from its entire derivatives portfolio and that the entire derivatives portfolio will rise in value by $31 million. These dollar amounts are modest relative to firm size, operating cash flows, investing cash flows and other firm benchmarks. The findings raise questions about the role of derivatives securities held by non-financial firms.

Keywords: Derivatives; Hedging; Risk management; Exposure

JEL Classification: G30, M41

Suggested Citation

Guay, Wayne R. and Kothari, S.P., How Much do Firms Hedge with Derivatives? (March 2001). Available at SSRN: https://ssrn.com/abstract=253036 or http://dx.doi.org/10.2139/ssrn.253036

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

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