Foreign Currency Derivatives Research Articles

Exchange Rate Exposure, Foreign Currency Derivatives and the Introduction of the Euro: French Evidence

In this paper, we investigative the impact of the introduction of the Euro on exchange rate exposures and the subsequent hedging practices of a sample of French corporations. Our findings indicate that the introduction of the Euro led to both a reduction in the number of firms that have significant exchange rate exposure and the absolute size of exposure. In response to these reduced exposures, French firms tend to use foreign currency derivatives less intensively although there has been no change in the number of firms that make use of the instruments. Furthermore, the use of foreign currency derivatives is found to be effective in managing exchange rate exposure but there is insufficient evidence that these instruments are more effective in post Euro periods.

Further Evidence on the Corporate Use of Derivatives in Australia: The Case of Foreign Currency and Interest Rate Instruments

In a recent issue of this journal Nguyen and Faff (2002) reported on an empirical exploration of the motives behind the aggregate use of financial derivatives by Australian companies. Employing the same sample of firms, the current paper extends their analysis to investigate similar issues, this time focussing separately on foreign currency and interest rate derivatives. At a specific level, our results reveal the following. A firm is more likely to use foreign currency derivatives if it is large and has more debt in its capital structure. Interest rate derivatives, on the other hand, are more likely to be used if a firm is larger, more levered, more liquid and pays higher dividends. These results are consistent with existing hedging theories. Market to book value (proxying growth opportunities), however, portrays an inconsistent relationship with the likelihood of interest rate derivative usage. When it comes to the extent of usage, a firm uses foreign currency derivatives more extensively if it is smaller, pays higher dividends and has more debt. Similarly, interest rate derivatives are used more extensively to address a high level of debt and a high dividend payout policy. At a general level, the current study confirms the core finding of Nguyen and Faff (2002), namely, that Australian companies use derivatives with a view to value maximisation.

Can the use of foreign currency derivatives explain variations in foreign exchange exposure?: Evidence from Australian companies

We investigate the role of foreign currency derivatives (FCD) in alleviating foreign exchange rate exposure of Australian firms. While there is some evidence that the use of FCD reduces the level of ex-post short-term exposure, such an effect is absent with regard to the degree of foreign operations. Our results support the view that FCDs are used to hedge existing exchange rate exposures and that Australian firms, generally, are extensively exposed to currency fluctuations in the long run. While monthly exposure appears to be a function of a firm's size and financial hedging, exchange rate exposure of shorter horizons (1 and 3 months) appears to be negatively related to a firm's price earnings ratio (proxying growth opportunities)—thereby supporting the ‘underinvestment’ hypothesis. Further, the exposure of longer horizons (12 and 24 months) is positively related to a firm's liquidity, supporting the view that liquidity is a substitute for hedging.

Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk?

Using a unique dataset, this study examines the relationship between foreign-denominated debt (FDD), foreign currency exposure and foreign currency derivative (FCD) use, for a sample of US multinational corporations. We find a positive relationship between the exposure to foreign currency risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover, FDD is negatively related to the use of FCD. We interpret this as further evidence that FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk.

Technology transfer, the role of the linker

Transferring technology from one organisation to another has been recognised for some time. However, what constitutes high technology has blurred in recent decades. It is widely understood that high technology involves computers. However, the new home theatre, complete with big-screen digital TV, DVD player, five speaker THX, Lucas or Dolby sound system, must also be high technology. New banking products such as purchasing foreign currency futures and derivatives are also high technology. In summary, many industries, both old and new, are now considered to be high technology. This article examines the role of the linker - the person who is the intermediary between the source of the high technology and the user of the high technology. It also reports a preliminary field study conducted both to test industry acceptance of the idea of technology linkers and the move towards an academic validation of a technology linker construct.

The Use of Foreign Currency Derivatives and Firm Market Value

The Use of Foreign Currency Derivatives and Firm Market Value

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

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 exchange-rate 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.

The Use of Foreign Currency Derivatives and Firm Market Value

This article examines the use of foreign currency derivatives (FCDs) in a sample of 720 large U.S. nonfinancial firms between 1990and 1995 and its potential impact on firm value. Using Tobin’s Q as a proxy for firm value, we find a positive relation between firm value and the use of FCDs. The hedging premium is statistically and economically significant for firms with exposure to exchange rates and is on average 4.87% of firm value. We also find some evidence consistent with the hypothesis that hedging causes an increase in firm value.

Derivatives Usage in Risk Management by US and German Non‐Financial Firms: A Comparative Survey

This paper is a comparative study of the responses to the 1995 Wharton School survey of derivative usage among US non‐financial firms and a 1997 companion survey on German non‐financial firms. It is not a mere comparison of the results of both studies but a comparative study, drawing a comparable subsample of firms from the US study to match the sample of German firms on both size and industry composition. We find that German firms are more likely to use derivatives than US firms, with 78 percent of German firms using derivatives compared to 57 percent of US firms. Aside from this higher overall usage, the general pattern of usage across industry and size groupings is comparable across the two countries. In both countries, foreign currency derivative usage is most common, followed closely by interest rate derivatives, with commodity derivatives a distant third. In contrast to the similarities, firms in the two countries differ notably on issues such as the primary goal of hedging, their choice of instruments, and the influence of their market view when taking derivative positions. These differences appear to be driven by the greater importance of financial accounting statements in Germany than the US and stricter German corporate policies of control over derivative activities within the firm.

The Use of Foreign Currency Derivatives and Firm Market Value

This paper examines the use of foreign currency derivatives (FCDs) by a sample of 720 large U.S. nonfinancial firms between 1990 and 1995 and its potential impact on firm value. Using Tobin's Q as an approximation of a firm's market valuation, we find a positive relationship between firm value and the use of FCDs. The hedging premium is statistically and economically significant mostly after 1993 and is on average 5.7\% of firm value. This result is robust to a) controls for size, profitability, leverage, growth opportunities, ability to access financial markets, industrial and geographical diversification, credit quality, industry classification (4-digit SIC), year-dummies and firm fixed-effects; b) the use of a weight-adjusted industry Tobin's Q and other measures of value, such as the market to book and the market to sales ratios; and, c) alternative estimation techniques that handle the potential impact of outliers. Using the ratio of foreign currency derivatives to foreign sales as a proxy for the percentage of exposure that a firm hedges, we observe a significant dispersion in our measure of the hedge ratio. In univariate tests we find a nonlinear relationship between Q and our proxy. However, firm-specific factors explain this relationship in multivariate tests and it appears that firms are hedging optimally.

The HJM Model: Its Past, Present, and Future, Keynote Address IAFE 1997 Conference

When I was I thinking about what to discuss in this address, my mind wandered across many topics. I first thought about discussing martingale probability measures and the topologies of asset pricing. I quickly discarded this topic for obvious reasons(and one not so obvious). The not so obvious one is that I was asked to avoid using any equations. I next thought about preaching on the evils of 'value at risk,' but learned that Steve Ross had talked about this in the past. One doesn't want to imitate a master. So, I rejected that topic. By then I was desperate. To illustrate how much so, I even thought about a banking topic=FE asset/liability management. I rejected this as well because after lunch, there is always the danger of putting everyone to sleep. Then, an inspiration hit. I remembered when I was a graduate student in the late 70s at MIT, how much I enjoyed listening to Bob Merton and Fischer Black talk about the historical development of the Black-Scholes formula. Who did what, and when? What were the stumbling blocks in the development, in particular, solving the Black-Scholes partial differential equation. To this day, I still like recounting those stories to my students. So, I thought I would share my insights and recollections on the development process of the Heath-Jarrow-Morton term structure model with you. In the process, I will take advantage of the historic progression to discuss the salient issues regarding its derivation and implementation. In addition, I will also discuss its extensions to foreign currency and credit derivatives. Finally, I will share my predictions with you on the future of research in this area, and on the future of the field of financial engineering itself.

Accounting versus Economic Exposure to Currency Risk

Financial statements do not accurately reflect the impact of foreign exchange movements on a firm's economic value, particularly if foreign currency debt or derivatives are used to hedge long-term economic exposure. To help analysts and investors interpret financial reporting in this area, this article illustrates the divergence between a firm's accounting exposure and its economic exposure, using scenarios of domestic firms, exporters, and multinationals.

Understanding foreign currency derivative measurements as FASB moves toward fair value reporting

AbstractThe authors explain foreign currency derivatives in light of the recent FASB moves toward reporting derivatives at fair value. They also reveal the results of a survey on how large companies have been reporting their foreign exchange derivatives contracts.