Is Operational Hedging a Substitute for or a Complement to Financial Hedging?

31 Pages Posted: 16 Sep 2005 Last revised: 24 Oct 2008

See all articles by Young Sang Kim

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Ike Mathur

Southern Illinois University at Carbondale - Department of Finance

Jouahn Nam

Pace University - Lubin School of Business

Abstract

This paper investigates operational hedging by firms and how operational hedging is related to financial hedging by using a sample of 424 firm observations, which consist of 212 operationally-hedged firms (firms with foreign sales) and a size and industry matched sample of 212 non-operationally-hedged firms (firms with export sales). We find that non-operationally-hedged firms use more financial hedging, relative to their levels of foreign currency exposure, as measured by the amount of export sales. On the other hand, though operationally-hedged firms have more currency exposure, their usage of financial derivatives becomes much smaller than that of exporting firms. These results can explain why some global firms use very limited amount of financial derivatives for hedging purpose despite much higher levels of currency risk exposure. We also show that hedging increases firm value.

Keywords: Operational hedging, Financial hedging, Foreign exchange exposure, Financial derivatives

JEL Classification: F23, F21, F31, G32

Suggested Citation

Kim, Young Sang and Mathur, Ike and Nam, Jouahn, Is Operational Hedging a Substitute for or a Complement to Financial Hedging?. Journal of Corporate Finance, Vol. 12, pp. 834-853, 2006. Available at SSRN: https://ssrn.com/abstract=799524

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Ike Mathur

Southern Illinois University at Carbondale - Department of Finance ( email )

Mailcode 4626
Carbondale, IL 62901-4626
United States
618-453-1421 (Phone)
618-453-5626 (Fax)

Jouahn Nam

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212-346-1818 (Phone)
212-346-1573 (Fax)

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