Hedge and speculation with currency derivatives: evidence of everyday operations

This study investigates the dynamics of currency derivatives usage by Brazilian non-financial firms, using a unique database of over-the-counter operations contracted between these companies and a large international bank between 2003 and 2008. Although prior studies using Brazilian (Novaes & Oliveira, 2005; Rossi, 2011) and US (Géczy, Milton, & Schrand, 2007) firms point to the existence of speculative behavior in managers' decisions, the effective impact of this behavior on the companies' operations is still little known, as are its implications for financial risk management and corporate governance. Our methodology compares the returns of derivatives contracts that were settled at their originally contracted maturity, with the return of contracts whose settlement was anticipated by the firm. We find evidence that routine decisions to commit to and unwind derivatives positions were influenced by speculative behavior in the period 2003-2008. However, during the period 2009-2011, we find no evidence of speculation, in line with the results of Coutinho, Sheng and Lora (2012). Our results reinforce the evidence that massive losses caused by currency derivatives in late 2008 worked as a wake-up call for managers, boards, investors and regulators, who started monitoring derivatives operations more closely.