1998 Wharton survey of financial risk management by US non-financial firms

Financial Management (Financial Management Association), Winter, 1998 by Gordon M. Bodnar, Gregory S. Hayt, Richard C. Marston

The figure shows that the most frequently cited motivations for transacting in the foreign currency derivatives markets are for hedging near-term, directly observable exposures. The most commonly hedged exposures were on-balance-sheet commitments (89% hedge frequently or sometimes), anticipated transactions expected within one year (85% hedge frequently or sometimes), and foreign repatriations (78% hedge frequently or sometimes).(4) Identifiable off-balance-sheet commitments are substantially less likely to be hedged by these firms than on-balance-sheet commitments. Anticipated transactions beyond one year are frequently hedged by 12% of the firms but sometimes hedged by 45%, suggesting that a majority of firms using foreign currency derivatives at least sometimes hedge exposures over a longer horizon. The more amorphous and longer-term competitive exposure is hedged frequently by just 11% of the firms but sometimes by an additional 28%, which is a noticeable increase from past surveys. Hedging translation exposure was a reason for currency derivatives transactions for only a minority of the firms, with 14% doing this frequently and another 23% doing so sometimes. Finally, transacting in derivatives to hedge exposures from arbitraging interest rates across currencies was done frequently by only 5% of the firms; however, 35% of the firms indicated that they do this sometimes.

C. Hedging Intensity

Not much is known about the extent to which firms hedge their various exposures, so in this year's survey we asked firms to indicate the percentage of the perceived exposure that they typically hedge across various categories of currency exposure. The responses were aggregated into four classes, firms that hedge 0-25%, 26-50%, 51-75%, and 76-100% of that particular exposure. Table 4 displays the percentage of firms that responded in each of the four groups for each of seven different categories of exposure. In each case, the percentages are taken only with respect to those responding firms that indicated in the previous question that such an exposure was applicable.

The table reveals that with the exception of three types of exposure - on-balance-sheet exposures, anticipated transactions less than one year and foreign repatriations - the majority of firms hedge less than 25% of their perceived exposures. Even for these three heavily hedged exposures, the average proportion hedged, shown in the final column of the table, is less than 50%. Only for on-balance-sheet commitments does the average percentage of the exposure hedged reach 50%. Thus, partial hedging appears to be normal practice for these firms. Even in the cases of these three types of exposures, only a third of the firms indicated that they hedged more than 75% of the total exposure. Again, these three were the more easily identifiable, near-term, transaction-based exposures. For longer-term exposures, such as anticipated transactions beyond one year and economic/competitive exposure, less than 10% of the firms indicated that they hedged as much as 75% of the perceived exposure. These results suggest that foreign currency hedging, rather than eliminating exposures, generally only reduces the exposures, but typically by less than half of the original outstanding exposure.