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Are firms hedging or speculating? The relationship between financial derivatives and firm risk

journal contribution
posted on 2010-05-21, 00:00 authored by Hoa NguyenHoa Nguyen, R Faff
The focus of this article is an investigation of the relationship between the use of financial derivatives and firm risk using a sample of Australian firms. Our results suggest that this relationship is nonlinear in nature. Specifically, the use of financial derivatives is associated with a risk reduction for moderate derivative users. Derivative usage among extensive derivative users, on the other hand, appears to lead to an increase in firm risk. Nevertheless, compared to firms that do not make use of derivatives, there is no evidence that extensive derivative users are exposed to a risk level in excess of that of nonderivative users. The results are, therefore, indicative of a hedging motive behind the use of financial derivatives.

History

Journal

Applied Financial Economics

Volume

20

Issue

10

Pagination

827 - 843

Publisher

Taylor & Francis

Location

London, England

ISSN

0960-3107

eISSN

1466-4305

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2010, Taylor and Francis

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