George Allayannis, Eli Ofek
ABSTRACT
We examine whether firms use foreign currency derivatives for hedging
or for speculative purposes. Using the sample of all S&P 500 nonfinancial
firms for 1993, we find strong evidence that firms use foreign currency
derivatives for hedging; the use of derivatives significantly reduces the
exchange-rate risk firms face. We also find that the decision to use derivatives
depends on exposure factors (i.e. foreign sales and foreign trade) and
on variables largely associated with theories of optimal hedging (i.e.,
size and R&D expenditures), and that the level of derivatives used
depends only on a firm's exposure through foreign sales and trade.
Allayannis: (804) 924-3434 allayannisy@darden.gbus.virginia.edu
Ofek: (212) 998-0356 eofek@rnd.stern.nyu.edu
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