The Journal of Finance, 52 4 , Accounting Commons. Advanced Search. Privacy Copyright. Skip to main content. Author s Christopher C. Publication Source The Journal of Finance. Abstract We examine the use of currency derivatives in order to differentiate among existing theories of hedging behavior.
Create Alert Alert. Share This Paper. Background Citations. Methods Citations. Results Citations. Tables and Topics from this paper. Foreign exchange service telecommunications Catherine Theory. Citation Type. Has PDF. Publication Type. More Filters. Highly Influenced. View 4 excerpts, cites background. We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using the sample of all SP the use of derivatives significantly reduces the exchange-rate risk firms … Expand.
View 4 excerpts, cites background and results. This paper investigates the determinants of currency risk management in non-financial firms in Argentina, Brazil, Chile and Mexico. We study not only the decision of using derivatives, but also the … Expand.
Why firms hedge with currency derivatives: an examination of transaction and translation exposure. This article examines Swedish firms' use of currency derivatives to provide empirical evidence on the determinants of firms' hedging decisions. The study uses survey data in combination with publicly … Expand. View 15 excerpts, cites methods, background and results. The benefit of corporate hedging remains controversial.
While hedging could reduce the likelihood of adverse outcome, it will incur additional costs that may offset such benefit. This study provides … Expand. View 2 excerpts, cites background. Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms. If the company strongly believes interest rates will drop between now and then, it could purchase or take a long position on a Treasury futures contract.
The company is effectively locking in the future interest rate. Here is a different example of a perfect interest rate hedge used by Johnson Controls JCI , as noted in its annual report:. Johnson Controls is using an interest rate swap. Before it entered into the swap, it was paying a variable interest rate on some of its bonds e. We can illustrate these variable rate payments with a down-bar chart. Now let's look at the impact of the swap, illustrated below.
The swap requires JCI to pay a fixed rate of interest while receiving floating-rate payments. The received floating-rate payments shown in the upper half of the chart below are used to pay the pre-existing floating-rate debt.
JCI is then left only with the floating-rate debt and has therefore managed to convert a variable-rate obligation into a fixed-rate obligation with the addition of a derivative. Note the annual report implies JCI has a perfect hedge : The variable-rate coupons JCI received exactly compensate for the company's variable-rate obligations.
Companies depending heavily on raw-material inputs or commodities are sensitive, sometimes significantly, to the price change of the inputs. Airlines, for example, consume lots of jet fuel. Historically, most airlines have given a great deal of consideration to hedging against crude-oil price increases.
Monsanto produces agricultural products, herbicides, and biotech-related products. It uses futures contracts to hedge against the price increase of soybean and corn inventory:.
We have reviewed three of the most popular types of corporate hedging with derivatives. There are many other derivative uses, and new types are being invented. For example, companies can hedge their weather risk to compensate them for the extra cost of an unexpectedly hot or cold season.
The derivatives we have reviewed are not generally speculative for the company. They help to protect the company from unanticipated events: adverse foreign exchange or interest rate movements and unexpected increases in input costs. The investor on the other side of the derivative transaction is the speculator. However, in no case are these derivatives free. Even if, for example, the company is surprised with a good-news event like a favorable interest rate move, the company because it had to pay for the derivatives receives less on a net basis than it would have without the hedge.
Berkshire Hathaway. Accessed April 22, Bank for International Settlements. Johnson Controls. Advanced Forex Trading Concepts. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
0コメント