Firm characteristics and derivatives hedging in the oil and gas industry

This paper studies the hedging policies of oil and gas firms for the year 2003. My study shows that firm characteristics are significant determinants of the decision to hedge. Leverage and liquidity were found to be characteristics that have a direct correlation with the decision to hedge. Firms with higher leverage ratios and lower quick ratios hedge more extensively. The significance of these characteristics shows that a need for risk management and mitigation arises when a firm is not financially independent and it relies on external sources of capital. Both these characteristics are also directly related to a firm's ability to take advantage of and finance investment opportunities.