The choice of hedging techniques and the characteristics of UK industrial firms

This study presents the empirical results for the relationship between the use of hedging techniques and the characteristics of UK multinational enterprises (MNEs). All the firms in the sample hedge foreign exchange (FX) exposure. The results indicate that UK firms focus on a very narrow set of hedging techniques. They make much greater use of derivatives than internal hedging techniques. The degree of utilisation of both internal and external techniques depends on the type of exposure that is hedged. Furthermore, the characteristics of the firms appear to explain the choice of hedging technique but the use of certain hedging techniques appears to be associated with increases in the variability of some accounting measures. This adverse impact of hedging has not been emphasised in the finance literature. The results imply that firms need to ensure that the appropriate techniques are used to hedge exposures. © 2000 Elsevier Science B.V. All rights reserved.