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How Much do Firms Hedge with Derivatives?

58 Pages Posted: 27 Mar 2001  

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: October 2002

Abstract

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

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

Wayne Guay (Contact Author)

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

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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