Exchange rate fluctuations and firm value: impact of global financial crisis

Abstract

PurposeThe purpose of this paper is to examine the presence of exchange rate exposure and its relationship with currency derivatives usage in the dynamic environment of the global financial crisis of 2008.Design/methodology/approachUsing a sample of 624 Indian firms over the period of April 2001–March 2016, this paper investigates the linear and asymmetric exposure by dividing the full sample period into different sub-periods around the crisis.FindingsThe evidence presented in the paper suggests that the firms are more exposed to the exchange rate changes since the onset of the financial crisis. However, there is a lack of evidence that the usage of currency derivatives is more effective in reducing exposure during the crisis/post-crisis period as opposed to the pre-crisis period.Practical implicationsThe findings are important to investors and managers for a better understanding of firm behaviours in relation to their risk management policies during the period of external shocks like crisis.Originality/valueThere is a paucity of research to explore whether the effect of currency derivatives usage on exchange rate exposure varies during external shocks such as crisis periods. The paper provides novel evidence that the effectiveness of derivatives usage in alleviating exposure becomes less during the dynamic environment of crisis.