This study examines the relationship between the use of foreign currency derivatives and exchange rate exposure in the U.S. banking industry. Using a sample from 15 U.S. banks for 2000-2008, capital market approach was employed for detect exchange rate exposure and two stage least square analysis was used for determine the relationship among exchange rate exposure and foreign currency derivatives. The results of this study suggest that the positive association use of currency derivatives for trading purposes, as their primary use, affect banks exchange rate exposure. The findings show evidence of reverse causality from exchange rate exposure and foreign currency derivatives.

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