Are Corporations Reducing or Taking Riskswith Derivatives?

Abstract

Public discussion about corporate use of derivativesfocuses on whether firms use derivatives to reduceor increase firm risk. In contrast, empiricalacademic studies of corporate dervatives use take itfor granted that firms hedge with derivatives. Usingdata from financial statements of 425 large U.S.corporations, we investigate whether firmssystematically reduce or increase their riskinesswith derivatives. We find that many firms managetheir exposures with large derivatives positions.Nonetheless, compared to firms that do not usefinancial derivatives, firms that use derivativesdisplay few, if any, measurable differences in riskthat are associated with the use of derivatives.