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

Hoa Nguyen, Robert Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

9 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)827-843
Number of pages17
JournalApplied Financial Economics
Volume20
Issue number10
DOIs
Publication statusPublished - May 2010
Externally publishedYes

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