WHY FIRMS USE CURRENCY DERIVATIVES

We examine the use of currency derivatives in order to differentiate a mong existing theories of hedging behavior. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This result suggests that firms might use deriv atives to reduce cash flow variation that might otherwise preclude fir ms from investing in valuable growth opportunities. Firms with extensi ve foreign exchange-rate exposure and economies of scale in hedging ac tivities are also more likely to use currency derivatives. Finally, th e source of foreign exchange-rate exposure is an important factor in t he choice among types of currency derivatives.