Wharton Survey of Derivatives Usage
by U.S. Non-Financial Firms

Financial Management
Vol. 24, No. 2,  1995

EXECUTIVE SUMMARY

In November 1994, the Weiss Center for International Financial Research of the Wharton School, with the sponsorship of The Chase Manhattan Bank, sent a detailed questionnaire on derivatives usage to 2000 non-financial corporations in the United States. To facilitate academic research on derivative usage, the firms were selected randomly from the set of firms on the 1993 Compustat database. The sample of firms spans a broad range of firm sizes as well as industries.

The survey consisted of a series of questions about derivatives usage, including the purposes for which derivatives are used, the organization of risk management activities, and reporting and control mechanisms. The participating firms were assured that only researchers at Wharton would have access to individual firm responses. Firms were given four weeks to respond with a single reminder postcard mailed out after two weeks. Of the 2000 surveys mailed we received 530 useable responses, which represents a respectable yield of 26.5%.

183 of the 530 firms that responded to the survey, or 35%, indicated that they use derivatives, defined in the survey as forwards/futures, options and or swaps. This percentage disguises some large differences across firms. While 65% of large firms use derivatives, just 30% of mid-sized firms and only 13% of small firms use them. The use of derivatives also varies considerably across industries. Commodity-based industries such as agriculture, refining, and mining, show the highest usage at about 50%. Manufacturing industries report derivatives use around 40%, while about 30% of firms in the regulated industries (public utilities and transportation) use derivatives. Derivatives use is even less common in service industries. Only 29% of wholesale and retail trade firms and just 14% of non-financial services firms use them.

The survey also sheds light on the use of derivatives by non-financial firms to manage four general types of exposures: foreign exchange, interest rate, commodity price, and equity price. From the responses, a clear pattern of specific instruments for specific exposures emerges. The standard forward contract is the most common instrument for managing foreign currency risk, with OTC options and currency swaps also important, while swaps are far and away the most prevalent instrument for managing interest rate risk. There was no dominant instrument for hedging commodity or equity price risk.

As for the purposes for which firms are making derivative transactions, the survey clearly indicates that firms are using derivatives to manage risk rather than to "take a view" on financial prices. The most common rationale for derivatives was to hedge well-defined exposures arising from firmly committed transactions, or anticipated transactions less than a year away. These were cited as reasons for derivatives usage by approximately 80% of the firms using derivatives.