1.04. Are derivatives instrument a risk management tool for agribusiness?

Autores: N. Magner

ABSTRACT
Evidence suggests that many firms manage their market risk through the use of derivatives, however, there are few studies simultaneously to test the validity of multiple theories related. In my sample of U.S. Agribusiness Industry (201 firms) 41% of firms used an instrument hedging in year-2008. The results suggest strong evidence for hypothesis of economies of scale, partial evidence for hypothesis underinvestment and alternative strategies, and poor evidence for agency problems.

According to this, a larger firm with more growth opportunities and a high level of leverage will be more likely to use derivatives or, alternatively the firm can increase its liquidity to replace the use of instrument hedging.

However, the impact of the firm size, growth opportunities and leverage on the likelihood of hedging is not proportional. A 10% increase in firm size increases by 6% probability of hedging, while a 10% increase in growth opportunities and leverage increased by 3% and 15% respectively the probability of hedging. Finally I test the possible existence of an effect of “opportunity cost” for firms facing exogenous risk difficult to cover with derivatives. In this sense, I was noticed that firms more exposed to exogenous risks on average use less derivatives and that within this group, there is only evidence supporting the hypothesis of economies of scale.
Keywords: Derivatives instrument – management risk