Currency Derivatives Research Articles

Impact of Derivatives Usage on Firm Value: Evidence from Non Financial Firms of Pakistan

The current study aims at investigating the impact of derivatives usage on firm value. For the given purpose, a sample of 107 non-financial firms listed on Karachi Stock Exchange (KSE) for the period of 2006-2010 is considered. Firm value is measured mainly through Tobin’s Q along with two more alternative measures named Alt. Q1 and Alt. Q2. Usage of three types of derivatives named General Derivatives (GD), Foreign currency derivatives (FCD) and Interest rate derivatives (IRD) are used as independent variables. Different panel data techniques of LM (Lagrange Multiplier) test, Random effect, Hausman specification test and fixed effect are applied in order to analyze whether the use of derivatives increases, decreases or does not have any impact on firm value. The current study finds no significant impact of derivatives usage on firm value while using Tobin’s Q is used as valuation measure. However use of FCD is associated with lower firm value while use of IRD adds value only in case when alternative measures of firm value (Alt. Q1 and Alt. Q2) are considered.

Pricing Currency Derivatives Under the Benchmark Approach

This paper considers the realistic modelling of derivative contracts on exchange rates. We propose a stochastic volatility model that recovers not only the typically observed implied volatility smiles and skews for short dated vanilla foreign exchange options but allows one also to price payoffs in foreign currencies, lower than possible under classical risk neutral pricing. The main reason for this important feature is the strict supermartingale property of benchmarked savings accounts, which the calibrated parameters identify under the proposed model. Using a real dataset on vanilla option quotes, we calibrate our model on a triangle of currencies and find that the risk neutral approach fails for the calibrated model, while the benchmark approach still works.

Hedge e especulação com derivativos cambiais: evidências de operações cotidianas

Este trabalho investiga a dinâmica no uso de derivativos de moedas por parte de empresas não financeiras brasileiras a partir de um banco de dados único, que contém 29 mil operações de balcão efetivamente contratadas por essas empresas junto a um grande banco internacional, entre 2003 e 2011. Embora pesquisas no Brasil (Novaes & Oliveira, 2005; Rossi, 2011) e nos EUA (Géczy, Milton, & Schrand, 2007) apontem para a existência de uma conduta especulativa nas decisões dos gestores, o efetivo impacto desse tipo de comportamento nas decisões da empresa ainda é pouco conhecido, bem como suas implicações para a gestão financeira de riscos e a governança corporativa. Nossa metodologia compara os retornos de contratos que foram mantidos até o vencimento, com os de contratos cuja liquidação foi antecipada pelas empresas. Os resultados mostram que, no período de 2003 a 2008, houve um forte componente especulativo nas decisões cotidianas de tomada e desmonte de posições com derivativos cambiais das empresas. Já no período de 2009 a 2011, não se identifica tal comportamento especulativo, em linha com os resultados de Coutinho, Sheng e Lora (2012). Os resultados reforçam a evidência de que as grandes perdas com derivativos cambiais em 2008 tenham funcionado como um alerta para gestores, conselheiros, investidores e reguladores, que passaram a monitorar mais atentamente as operações com derivativos.

Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions

We study the exchange rate exposures of a sample of firms that undertake large acquisitions of foreign companies. Using data from Securities and Exchange Commission (SEC) filings on their foreign operations and derivatives usage, we examine how the exposures change from before to after the acquisition. We find that these deals generally lead to reduced currency exposure, which reflects the fact that most of the firms already have business in the target's country and the mergers serve as operational hedges. In contrast, we do not find a statistically significant effect for hedging with currency derivatives despite the fact that many of the firms in the sample use such instruments.

Foreign Currency Derivatives and Foreign Exchange Rate Exposure Management of KOSDAQ Firms

This study examines the foreign currency derivatives trading of KOSDAQ firms and analyses the relations of derivatives trading and foreign exchange rate exposure in the period 2005~2010. The amount of derivatives trading reaches 27.7% of total assets for the trading firms before global financial crisis period (2005~2007). While, the amount decreases to 17.6% of total assets during the crisis period (2008~2010). These amounts are much greater than those of KOSPI firms which are calculated using similar data specification and periods. The variables which are usually adopted as determinants of derivatives trading do not explain the usage of derivatives in the analysis of period 2005~2007. These results suggest that KOSDAQ firms use derivatives not only foreign exchange risk managements but also trading purposes during this period. Test results do not show sufficient evidence that KOSDAQ firms use derivatives trading in an effective manner to manage foreign exchange rate exposure. In sum, test results suggest that to achieve the goal of managing foreign exchange rate exposure firms should estimate their open position in foreign currency properly before conducting foreign currency derivatives trading.

A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage

In an attempt to explain the weak evidence of priced exchange rate risk, we hypothesize that in addition to currency derivative usages, earnings management serves as another factor contributing to a reduction in exchange rate exposure. Our evidence reveals that earnings management activities, particularly those undertaken for the purpose of income smoothing, significantly reduce firm-specific exchange rate exposure, and that such role is particularly important if appropriate currency derivative instruments are limited. These results complement prior attempts to explain the puzzle of unpriced exchange rate risk. The investigation also highlights the importance of recognizing different managerial purposes behind discretionary accruals.

Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms

We investigate the determinants of firms' use of foreign currency derivatives in emerging markets exposed to currency crises. We develop a model where a firm with international orientation chooses its optimal foreign debt and hedging ratio. In the context of highly volatile exchange rate periods in five Latin American countries, we calibrate the model on ADRs. We find theoretical and empirical evidence that country specific factors (i.e. aggregate exposure of a country to a crisis) explain significantly part of our firms' foreign debt and hedging policy, as opposed to literature on firms in developed markets. We claim that derivative markets have been effective tools for firms in these countries, at least in the post-crisis era.

The failure of risk management for nonfinancial companies in the context of the financial crisis: lessons from Aracruz Celulose and hedging with derivatives

The main contribution of this article is to present hard evidence on hedging strategies and relate it to behavioural and agency problems resulting from speculation with derivatives. We focus on the case of Aracruz Celulose. We show how the real hedge position of Aracruz – that lost US2.1 billion in currency derivatives – deviated from its optimal hedge as the result of speculation with Over-the-Counter (OTC) derivatives.

Tipping the Balance

In its emphasis on the legal technicalities this article is concerned with materiality of financial markets – a key theme in social studies of finance. The paper insists on the importance of local legal culture by articulating this concept in distinction to politics. Focusing on the Amendment to Article 1062 of the Russian Civil Code concerning an important class of financial products – cash-settled currency derivatives – it synthesises the insights of actor-network theory and finitism, and argues that local legal culture is a composite of both distributed agencies and interpretative acts.

VALUE DRIVERS TERHADAP NILAI PEMEGANG SAHAM PERUSAHAAN YANG HEDGING DI DERIVATIF VALUTA ASING

Fakultas Ekonomi Universitas Muhammadiyah MalangE-mail: fika@umm.ac.idABSTRACTThe aim of this research are to understanding and analyzing the effect of value drivers variables(sale growth, operation profit, fixed asset investment, work capital investment, and capital cost) onshareholder value in the company with hedging strategy in foreign currency derivative. Result ofresearch indicates that: value drivers actually are expected to increase the shareholder value incompany with hedging strategy in foreign currency derivative; value drivers actually may increasethe shareholder value in company with hedging strategy in foreign currency derivative, capital costcannot improve shareholder value in company with hedging strategy in foreign currency derivative;and sale growth is the strongest factor to increase shareholder value in company with hedging strategyin foreign currency derivative.Key words: value drivers, shareholder value, hedging, foreign currency derivative

Hedging of Forex Exposure through Currency Derivatives-Evidence from Select Indian Corporate

To save Indian economy from collapse, in the year 1991 policy of globalization and liberalization were introduced in India. As a corollary trade barriers were also removed. It resulted into integration of domestic economy with world economy and there was substantial into flow (in and out) of capital crossing the border of the nation. However the free flow of capital and free trade exposed the Indian corporate enterprises to a higher foreign currency risk. To avoid huge loss caused by foreign exchange volatility, the currency derivatives in Indian Financial market were introduced. In the year 1999, Reserve Bank of India introduced Currency forwards, National Stock Exchange also launched the platform for trading in currency futures in 2008 and trading in Currency Options in 2010. The Indian firms were given the opportunities to effectively manage the foreign exchange risk exposure and to hedge their foreign exchange risk by using the currency derivatives. This paper attempts to evaluate the various alternatives available to the Indian corporate for hedging financial risks and this has been evaluated in select corporate enterprises.

Trends in the South African Hedging Space Part I: Derivatives Market Trade Numbers & Equity Index Concentration

This report considers the South African market from two trade-led perspectives. In the first segment, we provide a critical and detailed breakdown of the equity and currency derivatives markets over the period 2007 to the end of 2012. We consider the evolution of index and single stock futures and options usage, the latent term-structure within the index derivatives market, the concentration within the single stock derivatives market, the USDZAR bias of the currency derivatives market, and finally give a short precis on events within the Can-Do derivatives space.In the second segment, we provide a diagnostic review of SA index concentrations between 2007 and 2012. We compare total concentration across all JSE indices as well as focussing on the latent stock, sector and currency bets within the same. Building on this, the idea of risk-optimised benchmark construction is introduced through a simple example.

Who Times the Foreign Exchange Market? Corporate Speculation and CEO Characteristics

This paper shows that managers' personal beliefs and individual characteristics explain a large share of the substantial time-variation of derivatives use beyond firm, industry, and market fundamentals. We construct a panel data set of foreign currency derivatives holdings and currency exposures for U.S. non-financial firms. We use a novel approach to build a firm-specific foreign exchange return. We find that managers adjust derivatives notional amounts in response to past foreign exchange returns, as if they were forming views on future currency prices. We then construct an empirical measure of speculative behavior for each firm to investigate the profile of the speculator. Firms where the CEO holds an MBA degree, is younger, and has less previous working experience speculate more. These results are consistent with overconfident managers taking more risk.

Exchange rate exposure and the use of foreign currency derivatives in the Australian resources sector

In this paper, we provide a re-examination of the exchange rate exposure and foreign currency derivative use by Australian resources firms in the 2006–2009 period which is characterized by increased volatility caused by the global financial crisis. In particular, we consider the interaction of a resources firm's exchange rate risk exposures, foreign currency derivative use and the global financial crisis simultaneously. Conforming to expectations, our results indicate that more companies are significantly exposed to exchange rate risk since the onset of the financial crisis. However, there is a lack of evidence that the use of foreign currency derivative is more effective in alleviating exchange rate exposures during the crisis as opposed to the pre-crisis period.

Currency Derivatives: Valuation and Risk Management

The currency derivative market has evolved from its early days when it was confined to transacting in listed futures contracts to modern times under which an array of investors such as portfolio managers, hedge funds, and central banks enter into over-the-counter transactions. In this paper, the valuation of currency derivatives is explored. With the currency valuation methods explained, the paper then moves on to discuss the currency risk management strategies.

Understanding Brazilian companies' foreign exchange exposure

The paper analyzes the exchange rate exposure of a sample of non-financial Brazilian companies from 1999 to 2009. The results confirm the importance of using nonlinear models to address companies' exchange rate exposure. The results indicate that when compared to the linear model commonly used in literature, the nonlinear model leads to an increase in the number of firms exposed to exchange rate fluctuations, which allows a more accurate analysis of the impact of exchange rate fluctuations on the value of firms. In addition, the paper shows that exporters and companies that hold foreign currency denominated debt are more likely to be exposed to exchange rate fluctuations and that the nonlinearity of companies' foreign exchange exposure is associated with the use of foreign currency derivatives.

외환파생상품사용이 기업가치에 미치는 영향

Under conditions of increasing environmental uncertainty, firms` risk management become important. This study examines the impact of foreign currency derivative usage on firm value using 3,004 Korean non-financial firms from 2002 to 2007. The results showed that there was no significant relationship between foreign currency derivative usage and firm value for the whole period and from 2002 to 2004 when exchange rate was relatively less volatile. But form 2005 to 2007 when exchange rate was volatile, foreign currency derivative usage gave significant negative impact on firm value, whereas when contract value was used, the relatinship was significantly positive. These results might be come from the characteristics of contract value and fair value of foreign currency derivatives. increased firm value when contract value was used as foreign currency derivative usage measure. But when fair value was used, there was no significance. For control variables, major shareholders ownership and foreign blockholders ownership was positively related with firm value.

Asymmetric Information and Corporate Risk Management by Using Foreign Currency Derivatives

We examine how information asymmetry affects a firm's incentive to hedge versus speculate by using foreign currency derivatives. We find a quadratic relation between asymmetric information and a firm's risk management activities. In particular, we find that the firms facing medium level of information asymmetry are more likely to hedge, while firms with very high and low levels of asymmetric information tend to speculate. Moreover, we find that our results hold primary for firms operating in highly competitive industries.

Japan's Currency Derivative Problem and Retail Investor Protection

Japan's Currency Derivative Problem and Retail Investor Protection

The use of foreign currency derivatives, corporate governance, and firm value around the world

This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers' self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm's internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm's motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers' self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.