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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Do nonfinancial firms use interest rate derivatives to hedge?
Daniel M. Covitz
Steven A. Sharpe
Abstract

We compile and analyze detailed information on the debt structure and interest rate derivative positions of nonfinancial firms in 2000 and 2002. We find that differences in debt structure across firms and time tend to be counterbalanced by difference in derivative positions. In particular, among derivative users, smaller firms tend to have relatively more interest rate exposure from liabilities than larger firms and tend to use derivatives that offset these exposures. Larger firms also tend to limit their interest rate exposures, but they do so through their choice of debt structure rather than with derivatives. On the other hand, we find that a large fraction of the change in derivative positions over time cannot be explained by changes in debt structure. Finally, we find no evidence that nonfinancial firms hedge interest rate exposures from their operating assets, but do not see this as supporting the hypothesis that firms use derivatives to speculate.


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Daniel M. Covitz & Steven A. Sharpe, Do nonfinancial firms use interest rate derivatives to hedge?, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2005-39, 2005.
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Keywords: Interest rate risk ; Hedging (Finance) ; Derivative securities ; Risk management
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