The effect of hedging exchange rate risk, interest rate risk and commodity price risk with derivative instruments on firm value

Nadhifah Almas,Chandra Wijaya,Sekar Anindyaswari,Fibria Indriati

doi:10.5267/j.msl.2020.11.034

Abstract

The purpose of this paper is to analyze the effects of firm value on hedging for exchange rates, interest rates and commodity price risks using derivative instruments as well as examining different types of derivative instruments, including forward contract, future contract, option contract, and swap contract, used as hedging instruments to assess their various effects on firm value. The proxy used for the firm value variable is Tobin’s Q, and the ordinary least squares regression is employed for the research method. The study used 348 records from non-financial companies listed on the Indonesia Stock Exchange over the period 2015–2018. There are different results. First of all, the use of hedging for exchange rate risk with derivative instruments has a positive and significant effect on firm value. Secondly, the use of hedging for interest rate risk with derivative instruments has a negative but not significant effect on firm value. In addition, the use of hedging for commodity price risk with derivative instruments has a positive but not significant effect on firm value. Moreover, the effects from hedging using derivative contracts in general on firm value does not give results that are different from the use of hedging risk for exchange rates, interest rates and commodity prices with derivative instruments.

Highlights

The economic condition of Indonesia is influenced by the global economic environment
The purpose of this paper is to analyze the effects of firm value on hedging for exchange rates, interest rates and commodity price risks using derivative instruments as well as examining different types of derivative instruments, including forward contract, future contract, option contract, and swap contract, used as hedging instruments to assess their various effects on firm value
The effects from hedging using derivative contracts in general on firm value does not give results that are different from the use of hedging risk for exchange rates, interest rates and commodity prices with derivative instruments

Summary

Introduction

The economic condition of Indonesia is influenced by the global economic environment. The larger the international transaction, the higher the potential to be exposed to exchange rate and interest rate fluctuations or variability in commodity prices (Suriawinata 2004). Risk is something that must be managed so that the company can maintain the stability of its profits (Repie & Sedana 2014). Hedging transactions are carried out to protect firms from risks, and one method of hedging is by using derivative financial instruments (Monalusi 2015). Financial markets are constantly changing, and a company’s activity in the contemporary global environment makes the identification and management of corporate financial risks (for example, exposure to foreign exchange rates, interest rates, equity, and commodity prices) increasingly important (Kapitsinas 2008)

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Conclusion