58 Pages Posted: 27 Mar 2001
Date Written: October 2002
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.
Keywords: derivatives, hedging, risk management, risk exposure
JEL Classification: G30, G24, M41
Suggested Citation: Suggested Citation
Guay, Wayne R. and Kothari, S.P., How Much do Firms Hedge with Derivatives? (October 2002). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=262544 or http://dx.doi.org/10.2139/ssrn.262544
By Kalpit Lodha