Is operational hedging a substitute for or a complement to financial hedging? |
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| Institution: | 1. Department of Economics and Finance, Northern Kentucky University, Highland Heights, KY 41099, United States;2. Department of Finance, Southern Illinois University, Carbondale, IL 62901, United States;3. Department of Finance and Economics, Pace University, New York, NY 10038, United States;1. Singapore Management University, 60 Stamford Road, Singapore 178900, Singapore;2. University of Illinois at Urbana-Champaign, 1206 S. Sixth Street, MC-706, Champaign, IL 61820, USA;1. Department of Banking and Finance, National Chi Nan University, Taiwan, ROC;2. Department of Finance, National Yunlin University of Science and Technology, Taiwan, ROC;1. School of Business and Economics, Humboldt University of Berlin, Dorotheenstr. 1, 10117 Berlin, Germany;2. Michael F. Price College of Business, University of Oklahoma, 307 West Brooks St., Norman, OK 73019, USA;3. College of Business & Economics, Lehigh University, 621 Taylor Street, Bethlehem, PA 18015, USA;1. Middlesex University Business School, Department of Management and Organisaitions, Williams Building, Hendon Campus, NW4 4BT, London, UK;2. Faculty of Banking and Finance, Foreign Trade University, 91 Chua Lang street, Dong Da, Hanoi, Vietnam; and Middlesex University Business School, Department of Management and Organisations, Williams Building, Hendon Campus, NW4 4BT, London, UK. |
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| Abstract: | This paper investigates operational hedging by firms and how operational hedging is related to financial hedging by using a sample of 424 firm observations, which consist of 212 operationally hedged firms (firms with foreign sales) and a size- and industry-matched sample of 212 non-operationally hedged firms (firms with export sales). We find that non-operationally hedged firms use more financial hedging, relative to their levels of foreign currency exposure, as measured by the amount of export sales. On the other hand, though operationally hedged firms have more currency exposure, their usage of financial derivatives becomes much smaller than that of exporting firms. These results can explain why some global firms use very limited amount of financial derivatives for hedging purpose despite much higher levels of currency risk exposure. We also show that hedging increases firm value. |
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