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

Posted: 12 Dec 1996

See all articles by George Allayannis

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: Undated

Abstract

This paper examines the use of foreign currency derivatives by S&P 500 nonfinancial firms during 1992-1993 and the potential impact on exchange-rate risk. The extent to which firms use foreign currency derivatives is positively related to the ratios of foreign sales to total sales and total foreign trade to total production. Including these factors substantially reduces the explanatory power of variables previously found to be important in a firm's decision to hedge foreign currency exposure. Firms also use foreign debt as an alternative to or in conjunction with foreign currency derivatives, although to a smaller extent. Similarly, the level of foreign debt use is positively related to the ratio of foreign sales to total sales. Consistent with a risk-reduction motive to use foreign currency derivatives, we find that the use of foreign currency derivatives significantly reduces the exchange-rate risk that corporations face.

JEL Classification: G13, F31

Suggested Citation

Allayannis, George and Ofek, Eli, Exchange Rate Exposure, Hedging and the Use of Foreign Currency Derivatives (Undated). Available at SSRN: https://ssrn.com/abstract=4604

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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