Abstract
The benefit of corporate hedging remains controversial. While hedging could reduce the likelihood of adverse outcome, it will incur additional costs that may offset such benefit. This study provides some evidences to resolve the debate. We examine the benefits of foreign currency derivatives usage in 134 non-financial firms listed on the New Zealand Stock Exchange. New Zealand dollar experiences relatively high volatility so it is an ideal setting to examine whether the currency derivative usage could add value to the firm. Using Tobin-Q and other of its variants as a proxy of firm value, we find no evidence supporting the notion that the use of foreign currency derivatives can enhance a firm value.
Highlights
Corporate hedging, commonly referred to risk management, is actively practiced in both large and small economies (Prevost, Rose, & Miller, 2000), the question “Why do firms hedge?” is still asked daily
This study aims to examine whether the use of foreign currency derivatives (FCDs) can cause higher firm market value within New Zealand
The main hypothesis is divided into two sub-hypotheses based on the finns’ foreign sales status, which allows the univariate tests to have a clear outline
Summary
Commonly referred to risk management, is actively practiced in both large and small economies (Prevost, Rose, & Miller, 2000), the question “Why do firms hedge?” is still asked daily. This study aims to examine whether the use of foreign currency derivatives (FCDs) can cause higher firm market value within New Zealand. The authors suggest that the increase in exchange-rate fluctuations is an indication of an increase in the riskiness of the multinationals’ cash flows Both future cash flows and the discount rate are two major elements that are widely used by financial professionals to value a firm’s exchange rate exposure, which plays an important role in altering investors’ expectations on the market value of a firm. There are three reasons why currency derivatives are focused on: 1) by considering the research target of this study, exchange rate risks have the premier position for New Zealand firms. It is practical to isolate it from other common risk factors that may affect firm market value; 2) previous empirical studies have shown mixed results on the effect of using other derivatives, such as commodity or interest rate derivatives.
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