Hedge or Speculation? Evidence of the Use of Derivatives by Brazilian Firms During the Financial Crisis

This paper analyzes the use of foreign exchange derivatives by non-financial publicly traded Brazilian companies from 2007 to 2009. Using balance-sheet data on firms’ positions in derivatives and their foreign exchange exposure, this study finds that a significant number of companies speculated in the derivatives market. Two types of speculators are identified: companies that significantly increased the volume of derivatives used during this period but used them in line with their currency exposure and companies that adopted positions that would have been inadvisable had the aim been to hedge their currency exposure. Despite the differences between the two types, there is one similarity: both tried to obtain gains through the continuous process of domestic currency appreciation. The study shows that companies that allegedly have an informational advantage on the foreign exchange market – exporters and companies with foreign-currency-denominated debt – are more likely to speculate. No other theory about the reasons why companies speculate can explain the behavior of these companies.