Why Firms Use Currency Derivatives
WP No. 96-4
51 Pages Posted: 14 Nov 1996
Date Written: October 1996
We examine firms' use of currency derivatives in order to differentiate among existing theories of hedging behavior. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This result suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. Firms with extensive foreign exchange-rate exposure and economies of scale in hedging activities are also more likely to use currency derivatives. Finally, the source of foreign exchange-rate exposure is an important factor in the choice among types of currency derivatives.
JEL Classification: G10, G31, G15
Suggested Citation: Suggested Citation