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香 港 樹 仁 大 學 Managing Financial Risk by Using Derivatives: A Study of Hong Kong Listed Companies Tai-yuen HON February 2012 經濟及金融學系 Working Paper Series Department of Economics and Finance Hong Kong Shue Yan University 0 Working Paper Series February 2012 All Rights Reserved ISBN: 978-988-18445-4-5 Copyright © 20 12 by Hong Kong Shue Yan University Information on the Working Paper Series can be found on the last page. Please address any comments and further inquiries to: Dr. Shu-kam Lee Working Paper Coordinator Department of Economics and Finance Hong Kong Shue Yan University 10 Wai Tsui Crescent Braemar Hill Road North Point Hong Kong Fax: 2806-8044 Tel: 2806-5121 (Mr. Jeffery Chan) Email: sklee@ Preliminary Copy Managing Financial Risk by Using Derivatives: A Study of Hong Kong Listed Companies Abstract This paper attempts to identify the ways that the Hong Kong companies in the Hang Seng Index Constituent Stocks manage their financial risk with derivatives. By analyzing the companies’ annual reports and financial reviews, it is found that 82.6% (38 out of 46) of these companies used derivatives in 2010. Specifically, 58.7% of them used swaps to hedge interest rate risk, and 54.3% of them used forward contracts to hedge foreign exchange risk. Besides, 69.6% of these companies reported that they managed transaction risk for foreign exchange objectives, and 63% of them reported that they reduced borrowing costs for interest rate objectives. The empirical results are largely consistent with the prediction that companies using derivatives to manage their financial risk. Keywords: financial risk, de