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Hedging operating and financing risk with financial derivatives during the global financial crisis

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  • Sung C. Bae
  • Taek Ho Kwon

Abstract

We investigate whether firms properly protect values from sudden exchange rate changes using financial derivatives. Sampling Korean firms, we compare firms experiencing significant changes in exchange rate exposures to firms experiencing no such changes surrounding the global financial crisis. We find that the former outnumbers the latter, uses more derivatives for hedging, and has lower firm values. We further show that the lower firm values are more pronounced for firms hedging financing risk than firms hedging operating risk with derivatives, indicating more difficulty of hedging financing risk in the face of a sharp depreciation of local currency during the crisis.

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  • Sung C. Bae & Taek Ho Kwon, 2021. "Hedging operating and financing risk with financial derivatives during the global financial crisis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(3), pages 384-405, March.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:3:p:384-405
    DOI: 10.1002/fut.22174
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    1. Sung C. Bae & Taek Ho Kwon, 2023. "Exchange Rate Risk Management using Currency Derivatives: The Case of Exposures to Japanese Yen," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(3), pages 621-647, September.

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