Abstract

In this study, we use a sample of 186 firms in Taiwan that have export ratio for at least 10 percent in the sample period to examine their exchange rate exposures and the effect of usage of currency derivatives on currency exposures. In the determinants of exchange rate exposure, we find that exchange rate exposure is positively related to the foreign sales ratio, firm size and quick ratio. Further, we add an interaction term by multiplying the degree of usage of foreign currency derivatives with other proxies of hedging incentives (or variables for firm characteristics). The empirical results show that in short-run, the usage of derivatives can reduce exchange rate exposure for firms with higher leverage ratio or larger firm size. In the longer term, as the foreign sales ratio is higher, firms can use currency derivatives to reduce their exchange rate exposures. Financial managers adopt the information as reference for their decisions on foreign exchange risk management and hedging activities.