Wharton Survey

Wharton Survey - Contemporary Issues Wharton Survey* of...

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Contemporary Issues Wharton Survey* of Derivatives Usage by U.S. Non-Financiai Firms Gordon M. Bodnar, Gregory S. Hayt, Richard C. Marston, and Charles W. Smithson Gordon M. Badnar is Assistant Profe,s,-ior of Finance at The Wharton School. Univer.'iity of Pennsy.'vania. Pluladvlphiu. PA. Gregoi-y S. Havt is Director at CIBC Wood Gundy Fitiancial Products. New York. NY. Riehard C. Marston is James R.F. Guy Professor of Finance and Economics at The Wharton School. Univer.sitv of Pennsylvania. Philadelphia. FA. Charles W. Smithson is M i Director at CIBC Wood Gundv Financial Prodticts. New York. NY. • While financial derivatives have been around for a very long time,' the pa.st decade and a half has seen the variety and complexity of the available derivatives increase markedly. The broad array of derivatives and derivatives strategies that exist today enhance the ability of firms to manage their financial risk exposure in an era characterized by highly volatile exchange rates, interest rates, and commtKJity prices. But the same derivatives that permit tlrm.s to reduce risk also provide opportunities for risk-taking by firms, thereby complicating the task of overseeing financial activities within firms. As a result, the question.s regulators, rating agencies, and shareholders have raised about risk management practice have taken on greater urgency. The Wharton survey was designed against this backdrop of increasing interest in derivatives practices by non-financial firms. Early in 1994. we began planning a survey that would be sent to non-financial corporations in the United States. Since banks both use and sell derivatives, we chose non-fmancia! corporations in order to focus on the activity of end users. The survey, which is reprinted at the conclusion of this article, contained questions on the organization of the risk management function, strategies and goals, reporting, and control. One of the primary objectives of the project was the creation of a database that would be suitable for academic *The 1994 survey was sponsored by the Chase Manliallan Bank. N.A. The 1995 survey will be sponsored by CIBC Wood Gundy. 'One of our favorite examples is the dual currency. conimodit>-c(invL'rtible bond Issued by the Confctleraie Slates of America in IJ<63: however, we have also found reference to what appears to be an option on olive presses ill a story about Thalos the Milesiiin in Aristotle's Pctiiics. Studies of risk management. This meant sampling from a large population and incorporating important firm chiiracteristies, such as industry, y^ue. . and capital structure. It was also important to avoid is much as possible a selection bias toward corporations ihat were already active derivatives users. To address those concems, a procedure was established for selecting a riindom sample of non-financial firms from the 1993 COMPUSTATdatabii.se.- The procedure resulted in the selection of 2,000 firms from over 40 industries, as defined by tw>digit S.I.C. codes.
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Wharton Survey - Contemporary Issues Wharton Survey* of...

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