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Empirical evidence on the incentives to hedge transaction and translation exposure

Author

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  • Niclas Hagelin

    (Stockholm University School of Business)

  • Bengt Pramborg

    (Stockholm University School of Business)

Abstract

We investigate Swedish firms’ use of financial hedges to reduce their foreign exchange exposure for 1997–2001. The study uses survey data, which enables us to differentiate between hedging aimed at translation exposure and transaction exposure, respectively. The survey responses show that more than 50% of the firms employ financial hedges and that transaction exposure is more frequently hedged than translation exposure. We find that the likelihood of using financial hedges is increasing with firm size and exposure and that liquidity constraints are important in explaining transaction exposure hedging. Importantly, we find that the existence of loan covenants explains translation exposure hedging. This suggests that firms hedge translation exposure in order to prevent costly violations of loan covenants.

Suggested Citation

  • Niclas Hagelin & Bengt Pramborg, 2004. "Empirical evidence on the incentives to hedge transaction and translation exposure," Finance 0407020, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0407020
    Note: Type of Document - pdf; pages: 27
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    References listed on IDEAS

    as
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    Cited by:

    1. Pramborg, Bengt, 2005. "Foreign exchange risk management by Swedish and Korean nonfinancial firms: A comparative survey," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 343-366, June.
    2. Hagelin, Niclas & Pramborg, Bengt, 2005. "Foreign exchange exposure, risk management, and quarterly earnings announcements," Journal of Multinational Financial Management, Elsevier, vol. 15(1), pages 15-30, February.

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    More about this item

    Keywords

    Risk management; hedging; foreign exchange exposure; transaction exposure; translation exposure; loan covenants; bond covenants;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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