Description:
This paper empirically tests the determinants of foreign currency hedging using a large sample of UK non-financial firms. I find, unlike similar studies using US data, strong evidence of a relationship between expected financial distress costs and the foreign currency hedging decision and more significantly the foreign currency only hedging decision. This contrast in the findings between this study and US studies might be due to the fact that several of the latter include other hedging firms in their non-hedging sample, which might bias the results against the a priori expectations. However, it might also be due to a country specific institutional factor, that is, UK firms face higher expected costs of financial distress due to differences in the bankruptcy codes in the two countries