Derivatives Use In The Partial Hedging Of Currency Risk: A Firm-Specific Approach To Understanding The Exchange Rate Exposure Puzzle

This study investigates whether firms with significant foreign exchange rate exposure change their future use of foreign exchange rate derivatives (FXDs). Unlike prior research, we employ firm-specific accounting data on hedging strategy and currency risk. Our results indicate that firms with high F...

Full description

Saved in:
Bibliographic Details
Published in:Journal of applied business research 2010, Vol.26 (1), p.109-120
Main Authors: Savchenko, Olesya, Makar, Stephen
Format: Article
Language:English
Subjects:
Accounting
Business management
Business strategies
Business studies
Currency
Derivatives
Economic crisis
Exchange rates
Foreign exchange rates
Hedging
Hypotheses
International finance
Multinational corporations
Risk management
Studies
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This study investigates whether firms with significant foreign exchange rate exposure change their future use of foreign exchange rate derivatives (FXDs). Unlike prior research, we employ firm-specific accounting data on hedging strategy and currency risk. Our results indicate that firms with high FXDs use relative to their foreign sales have significant exposure to either firm-specific bilateral exchange rates or a broad exchange rate index. Among such firms with significant foreign exchange rate exposure, we find that partial hedgers change their future use of FXDs, consistent with our expectations for firms that monitor the effectiveness of their hedging strategy. These results are timely in light of the increased scrutiny of derivatives use during the current financial crisis, and contribute to our understanding of extant research on returns-based estimates of foreign exchange rate exposure (aka, the exchange rate exposure puzzle).
ISSN:0892-7626
2157-8834
DOI:10.19030/jabr.v26i1.281