Insurancehedging is a necessary condition for a

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insurance/hedging is a necessary condition for a welfare increase of deriva tives (the availability of derivatives) we will focus on it in the remainder of this chapter. Whereas for companies in the USA the issue has been repeatedly considered in academic literature, to the best of our knowledge this is the first study on this topic for German large and mid size companies. Within the scope of the survey we first ask the participants directly on the purposes of derivatives on different underlyings in their company and second propose an own empirical analysis on the sensitivity of stock prices to fluctua tions in the most relevant source of risk in order to approach an objective as sessment (see Figure 33. ) Figure 33 For which purpose does your company use derivatives? Hedging or exhaustion of profit potentials from expected market movements (speculation) and arbitrage opportunities
The Role of Investment Banking for the German Economy 104 The responses to the direct question on the purposes of use of derivatives indicate that the majority of companies use derivatives to hedge their most relevant risks – foreign exchange (hedged by 96.8%), interest rate (hedged by 95%) and commodity price risk (hedged by 75.4%). For the subsequent empirical analysis we focus on foreign exchange risks ex clusively foreign exchange is indicated as the most relevant source of risk for most of the companies in the sample. The complementary empirical investiga tion confirms the results of the survey responses: Companies are using deriva tives mostly for hedging purposes. As has been noted above the use of derivatives for hedge (insurance) would imply that company’s cash flows and hence profits are independent of fluctua tions of the underlying source of risk. In contrast the less companies hedge the more susceptible their profits are against fluctuations in the most relevant risk sources. In case companies use derivatives in connection to their most rele vant risks but the risk still remain in the company or are even higher than they would be if the company would not use derivatives – this is an indication that the company does not use derivatives to hedge risks, hence there is no reason to argue a welfare increasing impact of derivatives. Unfortunately, as time series data on corporate derivatives use of derivatives is missing, one cannot draw conclusions on the impact of derivatives use for each company individu ally and draw a conclusion on which companies use derivatives for hedging and which companies do not. However, one can estimate the sensitivity of the company’s stock price to fluctuations in the sources of risk and compare these sensitivities in a panel of firms. This procedure allows us to draw conclusions on the prevailing use of derivatives across the companies in our sample.

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