Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

CONCLUSIONS 
The purpose of this study was to examine the level of interest rate exposure among lodging firms and 
whether this exposure is reduced by the use of derivatives among a sample of lodging firms from 2000-2004.
Lodging firm disclosures indicate that almost all firms are concerned with interest rate exposures. The empirical 
results show that 34 firms face zero exposure and 13 firms faced significant positive exposure. These findings imply 
that the majority of lodging firms prefer a debt structure that is comprised largely of fixed rate debt. Three key 
strategies emerge about how firms manage risk exposures. First, many firms disclose that they finance with long-
term fixed rates when possible, especially among firms that do not use derivatives. Second, lodging firms use a mix 
of short-term floating debt and long-term fixed debt to maintain an optimal or desired mix of fixed debt to floating 
debt. In some cases, the mix may be achieved with the use of derivatives while in other cases through debt 
refinancing. Third, lodging firms may use interest rate swaps to alter the exposure of existing debt from a floating 
(fixed) rate to a fixed (floating) rate. Alternatively, firms may use interest rate caps to hedge against rising interest 
rates. These strategies show that lodging firms do not exclusively use derivatives to mitigate exposure but have 
other tools to mitigate risk exposure.
The key finding of this study is a reduction in risk exposure from the use of derivatives even after 
controlling for interest and foreign currency exposure. The results are robust to alternative specifications of the 
model including the use of several alternative variables. The results confirm prior findings in the lodging industry 
that derivatives are used to hedge and not for speculation. More importantly, this study makes a significant 
contribution to the limited empirical studies that investigate the effect of interest rate derivatives on interest rate 
exposure among nonfinancial firms. Additionally, the findings show the book-to-market ratio (underinvestment 
costs), interest coverage ratio (financial distress), firm size, proportion of floating debt, and the foreign sales ratio, to 
be significant determinants of exposure.
Given the rapid growth in the use of derivatives and a reduction in the transaction costs of these 
instruments, the implications for lodging managers are significant. Lodging managers must implement cost 
effective risk management strategies in order to mitigate exposure from changes in interest rates. Although 
derivatives are just one of many tools that firms may have at their disposal, lodging managers should consider using 
them in combination or in conjunction with other long-term risk management tools such as operational hedging. 

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