Why Do Companies Use Derivatives to Hedge Risk? Evidence from New Zealand

Derivatives are set to hedge underlying-assets risks, but what firm-specific factors determine the use of derivatives are yet conclusively discovered. Using 308 manually collected annual reports from the listed companies and a logit regression model, this paper investigates the determinants factors of derivatives usage among New Zealand listed companies. Based on the empirical framework, we find three important “triggering” factors. 1) Larger firms have more incentives to employ derivatives. 2) Firms that face more foreign exchange exposures are more likely to use derivatives. 3) Companies have fewer incentives to consider the use of derivatives if they have more internal funding to finance their investments. In addition, our results remain quantitively unchanged from a battery of robustness checks when controlling the industry effect and year effect