| After the financial crisis, the main national commercial Banks signed currency swaps between each other. During 2009, the notional amount of currency swaps totaled above $400 billion. As the end-users of currency swaps are primarily multinational companies. This paper will link currency swaps and economic exposure of multinational companies, in order to know why the currency swap is still so popular.This paper summarizes the theories in the past. Suppose the fluctuation of the exchange rate follows a random-walking, this paper establishes the binary tree of the future cash flow. Firms choose the financing strategy that maximizes the shareholder's wealth. The expected pay-off to the shareholders of the firm is computed as the expected cash flow less the cost of financing. On the other side, the investors ask for risk-free interest payment in the risk neutral world. When these two parts get balance, the proposition is also coming. The empirically testable hypothesis, higher the level of economic exposure, higher the probability that the firm will use a currency swap, derivates from the proposition.This paper focuses on non-financial corporations because of their more frequent use of derivatives for trading purpose. The sample is the Fortune 500 non-financial American firms. Firms with insufficient information or not listed are excluded from the final sample. Consequently, there are 54 firms in the final sample. The data are for the period of 1998-2009. To test the economic exposure effect on firms'currency usage, this paper uses a cash flow-based measure to estimate exposure. This paper uses statistical testing and the qualitative response regression model. The results of empirical analysis (using both univariate and multivariate techniques) strongly support the hypothesis. This paper provides some suggestions about the selection of financing strategy, when firms face different economic exposure. |
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