Do Nonfinancial Firms Use Interest Rate Derivatives to Hedge?

We compile and analyze detailed information on the debt structure and interest rate derivative positions of nonfinancial firms in 2000 and 2002. We find that differences in debt structure across firms and time tend to be counterbalanced by differences in derivative positions. In particular, among derivative users, smaller firms tend to have relatively more interest rate exposure from liabilities than larger firms and tend to use derivatives that offset these exposures. Larger firms also tend to limit their interest rate exposures, but they do so through their choice of debt structure rather than with derivatives. On the other hand, we find that a large fraction of the change in derivative positions over time cannot be explained by changes in debt structure. Finally, we find no evidence that nonfinancial firms hedge interest rate exposures from their operating assets, but do not see this as supporting the hypothesis that firms use derivatives to speculate. JEL. Classification: G32 * This paper reflects the views of the authors only and not necessarily those of the Board of Governors, other members of its staff, or the Federal Reserve System. We thank Long Drake Pham and Francis Quimby for excellent research assistance. We are indebted to George Fenn and Mitch Post for their work on an earlier incarnation of this paper. ** Corresponding author: Mail Stop 89, Federal Reserve Board, 20 and C Sts. NW, Washington, DC 20551, USA. E-mail address: [email protected]