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. (C) 2001 Elsevier Science Ltd. All rights reserved.