Hedging instrument in post liquidity crisis: a case of interest rate swaps

Abstract

Purpose

Using Fortune 50 company financial statements data, this paper aims to investigate the use of interest rate swaps in post‐liquidity crisis.

Design/methodology/approach

The paper uses Fortune 50 company financial statements data in this study.

Findings

The paper finds that the 50 largest US firms use this derivative mainly for hedging purpose. This is consistent with the prediction that facing unprecedented level of economic uncertainty sample firms use this instrument mainly to hedge against interest rate fluctuations, thus reducing their vulnerability in the credit market.

Originality/value

This finding is different from the findings of prior swap literature in that speculative motivation of swaps from fixed to variable interest payments are no longer found. The authors attribute this new evidence to the changed macro‐economic environment where firms' natural reaction to the increased uncertainty is to protect assets and liabilities, not to take chances on the directions of the market interest rates.

Citation

Allen, S., Kim, S. and Zitzler, M. (2013), "Hedging instrument in post liquidity crisis: a case of interest rate swaps", Managerial Finance, Vol. 39 No. 1, pp. 47-59. https://doi.org/10.1108/03074351311283568