This paper examines whether firms use foreign currency derivatives for hedging or speculative purposes. Using a sample of S&P 500 nonfinancial firms for 1993, the authors find that firms use currency derivatives to hedge against exchange-rate movements, as their use significantly reduces exchange-rate exposure. They also find that the decision to use derivatives depends on exposure factors (foreign sales and trade) and variables related to optimal hedging theories (size and R&D expenditures). However, the level of derivatives used depends only on a firm's exposure through foreign sales and trade. The authors test the hypothesis that using foreign currency derivatives for hedging reduces a firm's exchange-rate exposure. They measure exchange-rate exposure as the sensitivity of the firm's value to an unanticipated change in an exchange rate. They find that firms with higher foreign sales exposure are more likely to use derivatives, and that the use of derivatives is negatively related to exchange-rate exposure. These findings are robust to alternative time periods, exchange-rate indices, and estimation techniques. The authors also find that firms use foreign debt to hedge against exchange-rate movements. They find that firms with higher foreign sales exposure are more likely to use foreign debt, and that the use of foreign debt is negatively related to exchange-rate exposure. These findings are consistent with the hypothesis that firms use foreign debt to hedge their exchange-rate exposure. The authors use a two-stage framework to examine what determines the level of derivative use. They find that firms with larger size, R&D expenditures, and exposure to exchange rates through foreign sales or trade are more likely to use currency derivatives. These results are consistent with the theory of optimal hedging and the high fixed start-up costs of hedging. They also find that exposure factors (foreign sales and trade) are the sole determinants of the degree of hedging. The authors also find that firms use foreign debt to hedge against exchange-rate movements. They find that firms with higher foreign sales exposure are more likely to use foreign debt, and that the use of foreign debt is negatively related to exchange-rate exposure. These findings are consistent with the hypothesis that firms use foreign debt to hedge their exchange-rate exposure. The authors conclude that firms use foreign currency derivatives and foreign debt as a hedge against exchange-rate movements. Their findings suggest that an intervention in the derivatives markets may not be warranted, and provide an explanation for the lack of significant exposure documented in past studies.This paper examines whether firms use foreign currency derivatives for hedging or speculative purposes. Using a sample of S&P 500 nonfinancial firms for 1993, the authors find that firms use currency derivatives to hedge against exchange-rate movements, as their use significantly reduces exchange-rate exposure. They also find that the decision to use derivatives depends on exposure factors (foreign sales and trade) and variables related to optimal hedging theories (size and R&D expenditures). However, the level of derivatives used depends only on a firm's exposure through foreign sales and trade. The authors test the hypothesis that using foreign currency derivatives for hedging reduces a firm's exchange-rate exposure. They measure exchange-rate exposure as the sensitivity of the firm's value to an unanticipated change in an exchange rate. They find that firms with higher foreign sales exposure are more likely to use derivatives, and that the use of derivatives is negatively related to exchange-rate exposure. These findings are robust to alternative time periods, exchange-rate indices, and estimation techniques. The authors also find that firms use foreign debt to hedge against exchange-rate movements. They find that firms with higher foreign sales exposure are more likely to use foreign debt, and that the use of foreign debt is negatively related to exchange-rate exposure. These findings are consistent with the hypothesis that firms use foreign debt to hedge their exchange-rate exposure. The authors use a two-stage framework to examine what determines the level of derivative use. They find that firms with larger size, R&D expenditures, and exposure to exchange rates through foreign sales or trade are more likely to use currency derivatives. These results are consistent with the theory of optimal hedging and the high fixed start-up costs of hedging. They also find that exposure factors (foreign sales and trade) are the sole determinants of the degree of hedging. The authors also find that firms use foreign debt to hedge against exchange-rate movements. They find that firms with higher foreign sales exposure are more likely to use foreign debt, and that the use of foreign debt is negatively related to exchange-rate exposure. These findings are consistent with the hypothesis that firms use foreign debt to hedge their exchange-rate exposure. The authors conclude that firms use foreign currency derivatives and foreign debt as a hedge against exchange-rate movements. Their findings suggest that an intervention in the derivatives markets may not be warranted, and provide an explanation for the lack of significant exposure documented in past studies.