The Impact of the Use of Derivatives and Operational Hedging on Foreign Currency Risk Exposure

Abstract

The purpose of this study is to investigate the impact of the use of derivatives and operational hedging on the foreign exchange risk exposure for a sample of 181 Australian multinational corporations. A two-stage market model is used, resulting in the implementation of a cross-sectional time series model, to test for the effect of the combined use of those two hedging activities on the exposure coefficients and to test whether the use of currency derivatives is a complement to operational hedging. The study finds that the combined use of these two hedging strategies are effective in reducing the firm's exposure and currency derivatives are a complement to operational hedging activities.