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Why Firms Use Currency Derivatives





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    • Géczy and Schrand are from the University of Pennsylvania and Minton is from Ohio State University. This article is based on an earlier working paper entitled “Why Firms Use Derivatives: Distinguishing Among Existing Theories.” We thank Gordon Bodnar, Alon Brav, Michael Brennan, Steve Kaplan, Tim Opler, Mitch Petersen, Raghu Rajan, David Scharfstein, René Stulz, Sheridan Titman, participants at the NBER Conference on Financial Risk Assessment and Management, the 1995 Western Finance Association meetings, the UCLA Conference on Corporate Risk Management, the Wharton Corporate Finance Brown Bag Seminar, and two anonymous referees for helpful comments. This work was completed while Géczy was at the University of Chicago and visiting at Ohio State University. Géczy and Minton thank the Dice Center for Financial Economics for financial support. Géczy also thanks the Center for Research in Security Prices for financial support.


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.

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