An examination of European firms’ derivatives usage: the importance of model selection

This paper employs a unique, largely hand-gathered dataset to investigate the determinants of both foreign currency (FX) and interest rate (IR) derivatives usage for a sample of European non-financial firms. By measuring the extent of usage for those that choose to use derivatives, we are able to separately employ a Tobit model and a two-part model, which allows the determinants of the usage decision to differ from the extent of usage decision. We find that while FX derivatives usage is motivated by economies of scale and FX exposure, IR derivatives usage is motivated by the magnitude and nature of firms’ debt. We also find that, for both FX and IR derivatives, the determinants of the usage decision differ from the determinants of the extent of usage decision, which suggests that a two-part model is the most appropriate model when examining firms’ derivatives policies.