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Rev Fin 2001; 14:243-276
© 2001 the Society for Financial Studies

Article

The use of foreign currency derivatives and firm market value

G Allayannisz and JP Weston1
Darden Graduate School of Business Administration, University of Virginia, PO Box 6550, Charlottesville, VA 22906-6550, USA
1 Rice University
z Corresponding author
E-mail: allayannisy@darden.virginia.edu

Abstract

This article examines the use of foreign currency derivatives (FCDs) in a sample of 720 large U.S. nonfinancial firms between 1990 and 1995 and its potential impact on firm value. Using Tobin's Q as a proxy for firm value, we find a positive relation between firm value and the use of FCDs. The hedging premium is statistically and economically significant for firms with exposure to exchange rates and is on average 4.87% of firm value. We also find some evidence consistent with the hypothesis that hedging causes an increase in firm value.


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