Management motivation for using financial derivatives in Australia

This study takes a direct approach to determine management motivation for the use of financial derivatives. We survey a sample of Australian firms on attitudes to derivative use and financial risk management. Management views are sought on the importance of a series of theoretical reasons for using derivatives. Generally, we find that managers are focused on the broad reduction of risk and volatility of cash flows and earnings in using derivatives. Specific issues such as reducing bankruptcy costs, debt levels and taxation are not considered as important. A further interesting result from this research is that even though firms may use derivatives they may not necessarily hedge all of their annual exposures across different financial risks. This helps explain the inconsistency of results in many empirical studies on the determinants of derivative use.

Two conceptions of reason

Two conceptions of reason are considered - the planning conception, embodied, for example, in rational choice theory and other familiar paradigms, and the improvisational conception, emerging from work on artificial intelligence and organization theory. Two illustrations are given of the problematic nature of the planning conception: ( 1) the inevitability of incompleteness in contracting and ( 2) the burdens of reason identified by John Rawls. Two diagnoses are provided for these infirmities: ( 1) the inexhaustibility of description and ( 2) the constructed nature of preferences and values. An alternative improvisational model is sketched and risk-spreading and bet-hedging are identified as two of its key technologies.