Exchange rate exposure, hedging, and the use of foreign currency derivatives

Journal of International Money and Finance
20 (2001) 273–296 www.elsevier.nl/locate/econbase Exchange rate exposure, hedging, and the use of foreign currency derivatives
George Allayannis

a,*

, Eli Ofek

b

a

b

Darden Graduate School of Business Administration, University of Virginia, PO Box 6550,
Charlottesville, VA 22906, USA
Stern School of Business, New York University, 44 West 4th St. #908, New York, NY 10012, USA

Abstract
We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using a sample of S&P 500 nonfinancial firms for 1993, we find evidence that firms use currency derivatives for hedging, as their use, significantly reduces the exchangerate exposure firms face. We also find that, while 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), the level of derivatives used depends only on a firm’s exposure through foreign sales and trade. © 2001 Elsevier Science
Ltd. All rights reserved.
JEL classification: F23; F30; G30
Keywords: Risk management; Multinationals; Corporate policies; Foreign trade

1. Introduction
Exchange-rate movements affect expected future cash flows, and therefore the value, of large multinationals, small exporters (importers) and import competitors, by changing the home currency value of foreign revenues (costs) and the terms of competition. In light of this, it is surprising that previous research in the area (Jorion,
1990; Amihud, 1993; Bodnar and Gentry, 1993) finds that US multinationals, exporters, and manufacturing industries are not significantly affected by exchangerate movements.
* Corresponding author. Tel.: [phone]; fax: [phone].
E-mail address: [e-mail] (G. Allayannis).
0261-5606/01/$ - see front matter © 2001 Elsevier Science Ltd. All rights reserved.
PII: S 0

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