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Why Firms Use Currency Derivatives
Author(s) -
GÉCZY CHRISTOPHER,
MINTON BERNADETTE A.,
SCHRAND CATHERINE
Publication year - 1997
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1997.tb01112.x
Subject(s) - currency , foreign exchange risk , monetary economics , cash flow , order (exchange) , business , exchange rate , foreign exchange swap , economics , foreign exchange , cash , financial economics , international economics , finance
We examine the use of currency derivatives in order to differentiate among existing theories of hedging behavior. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This result suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. Firms with extensive foreign exchange‐rate exposure and economies of scale in hedging activities are also more likely to use currency derivatives. Finally, the source of foreign exchange‐rate exposure is an important factor in the choice among types of currency derivatives.