An Empirical Case Study of Foreign Asset & Derivatives Leverage Effect on the Shipbuilding Firms

Abstract

Purpose – This study aims to analyze the foreign asset leverage effect on Korean shipbuilding companies’ foreign profitability and maintain the appropriate foreign asset size for reducing exchange risk. Design/Methodology/Approach – As a research method, a simple average difference comparison method was used to estimate and compare the difference from the total average value for each variable. Our paper proceeds in presenting serial-stage analysis considering exchange risk factors through estimation on transformation of foreign transactions & derivatives including annual trends of foreign asset and industrial characteristics. Findings – The value of the foreign asset leverage effect on shipbuilding companies was -36.4, and the result was more negative than other industries. This is because ship manufacturing companies focus more than 85% of their sales on overseas transactions and have large amounts of transaction units. Especially, the proportion of the gains from the derivatives book valuation process accounts for 109.8% of the net foreign profits. Research Implications – We need to introduce an independent credit rating system for foreign currency accounts which reflect the relating stability of the foreign currency denominated transaction on global business companies. From a long-term perspective, the exchange risk management of global companies requires relationships and mutual understanding with stakeholders in addition to financial hedging tools.