Empirical Evidence Concerning Incentives to Hedge Transaction and Translation Exposures

Posted: 3 Jun 2005

See all articles by Niclas Hagelin

Niclas Hagelin

Nordea Bank, Nordea Markets

Bengt Pramborg

Swedish Export Credit Corporation

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Abstract

We investigate Swedish firms' use of financial hedges against foreign exchange exposure. Our survey data lets us distinguish between translation exposure and transaction exposure hedging. Survey responses indicate that over 50% of the sampled firms employ financial hedges, and that transaction exposure is more frequently hedged than is translation exposure. The likelihood of using financial hedges increases with firm size and exposure, and liquidity constraints are important in explaining transaction exposure hedging. Importantly, the existence of loan covenants accounts for translation exposure hedging, suggesting that firms hedge translation exposure to avoid violating loan covenants.

Keywords: Hedging, foreign exchange exposure, translation exposure, loan covenants, bond covenants

JEL Classification: F23, F31, M41, M43, G21

Suggested Citation

Hagelin, Niclas and Pramborg, Bengt, Empirical Evidence Concerning Incentives to Hedge Transaction and Translation Exposures. Journal of Multinational Financial Management, Vol. 16, pp 142-159, 2006, Available at SSRN: https://ssrn.com/abstract=734063

Niclas Hagelin

Nordea Bank, Nordea Markets ( email )

Hamngatan 10
Stockholm, SE-105 71
Sweden

Bengt Pramborg (Contact Author)

Swedish Export Credit Corporation

Box 194
Stockholm, 101 23
Sweden

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