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This paper
examines the use of foreign currency derivatives (FCDs) in a sample of 720
large U.S. nonfinancial firms between 1990 and 1995 and its potential impact
on firm value. Using Tobin's Q as a proxy for firm value, we find a positive
relation between firm value and the use of FCDs. The hedging premium is
statistically and economically significant for firms with exposure to
exchange rates and is on average 4.87 percent of firm value. We also find
some evidence consistent with the hypothesis that hedging causes an increase
in firm value.
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