<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">This study investigates whether firms with significant foreign exchange rate exposure change their future use of foreign exchange rate derivatives (FXDs). Unlike prior research, we employ firm-specific accounting data on hedging strategy and currency risk. Our results indicate that firms with high FXDs use relative to their foreign

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... s have significant exposure to either firm-specific bilateral exchange rates or a broad exchange rate index. Among such firms with significant foreign exchange rate exposure, we find that partial hedgers change their future use of FXDs, consistent with our expectations for firms that monitor the effectiveness of their hedging strategy. These results are timely in light of the increased scrutiny of derivatives use during the current financial crisis, and contribute to our understanding of extant research on returns-based estimates of foreign exchange rate exposure (aka, the exchange rate exposure puzzle).</span></span></p>