The determinants of the scale of foreign exchange and interest rate derivatives transactions

Abstract

Abstract: Many entrepreneurial firms depends much more on import, export and external debt financing, so they need to manage the foreign currency and interest rate risks by means of foreign currency or interest rate derivatives. This paper collects derivatives transaction data fromover 60 listed companies including entrepreneurial firms, defines derivatives transaction scale by dividing thecontractual nominal principal by foreign currency or interest rate risk exposures. The empirical results support themanagement of foreign exchange and interest rate risk, the alleviation of under-investment, the complementary nature of foreign debt and derivatives, and the cash flow incentives hypotheses. As for the results of the tests for the hypotheses of manager utility maximization, financial distress, derivatives substitute for cash as risk reduction instrument, they are contrary to that of interest rate derivatives. The multi-regression results are misleading based on the prior literature's scale measures of foreign currency or interest rate derivatives transaction. Finally, the author gives his own policy suggestions.

Key words: derivative transaction scale, foreign debt, foreign currency and interest rate derivatives, risk exposure

CLC Number:

F275.1

Liu Renfan. The determinants of the scale of foreign exchange and interest rate derivatives transactions[J]. Science Research Management, 2015, 36(6): 157-167.

References

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