To Hedge or not to Hedge: An Empirical Analysis on the Determinants of Corporate Interest Rate Risk Management

Detta är en D-uppsats från Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Sammanfattning: Two theories explain why company size and leverage affect interest rate hedging: Economies of scale of derivatives usage and expected costs of financial distress. We test whether these determinants affect corporates in the decision to hedge interest rate risk with derivatives. Building on a new, hand-collected data set on interest rate swap usage of corporate constituents of the S&P 500, we find that firms' decisions to hedge are impacted by size and leverage. Differentiating between two kinds of exposures, relating to either rising or falling interest rates, we show that size affects the decision to use fixed-to-floating swaps, and leverage affects the decision to swap floating debt into fixed-rate debt. Our results also indicate differences in the determinants of the decision to hedge and the hedging extent.

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