The usefulness of SFAS 119 derivatives disclosures for assessing the foreign exchange risk exposure of manufacturing firms
This paper investigates whether Statement of Financial Accounting Standards No. 119 (SFAS 119) disclosures are useful for assessing the sensitivity of a firm's equity return to currency fluctuations (currency exposure). First, the study demonstrates how the notional amount and fair value of foreign exchange derivative instruments, separately and jointly, are related to currency exposure. The derived relations provide potential implications for improving the usefulness of these two quantitative disclosures and a framework for analyzing the data. Second, empirical analysis is performed on the 1994-1996 disclosures for a sample of US manufacturing firms. Based on a self-constructed currency index, I find weak evidence that the SFAS 119 derivatives disclosures are correlated with the information used by stock market participants in assessing firms' overall foreign exchange (FX) risk exposure. The weak findings can be attributed to the various shortcomings of the accounting disclosures discussed in the paper. To the extent that financial statement users face similar problems, the usefulness of accounting disclosures for assessing financial risk exposures will be limited.
|Year of publication:||
|Authors:||Wong, Moon-Hung Franco|
|Type of publication:||Other|
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