How Much do Firms Hedge with Derivatives?
Wayne R. Guay
University of Pennsylvania - Accounting Department
Massachusetts Institute of Technology (MIT) - Sloan School of Management
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.
Number of Pages in PDF File: 52
Keywords: Derivatives; Hedging; Risk management; Exposure
JEL Classification: G30, M41
Date posted: December 13, 2000