Foreign Exchange Risk Hedging Research Articles

Mandatory governance reform and corporate risk management

Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.

Stock market uncertainty and uncovered equity parity deviation: Evidence from Asia

Recently, many empirical studies document that a country's stock market performance relative to the US and its local currency units per US dollar tend to move in opposite direction over the short run, also known as the uncovered equity parity (UEP) condition. However, those studies have applied only to advanced economies to date. This study conducted the same tests to a sample of 18 Asian economies. To one's surprise, we found that the UEP condition reverses its sign among Asian currencies. In addition, measures of stock market uncertainty are suggested as a potential driving force behind this UEP reversal for Asian economies. This surprising result suggests that there might be other mechanisms behind the joint dynamics of equity and currency returns than the portfolio rebalancing caused by incomplete foreign exchange risk hedging. The reasoning is that Asian foreign exchange (FX) markets are even more subject to incomplete foreign exchange risk hedging. Thus, one should expect even stronger UEP evidence from Asian currency markets if the portfolio rebalancing mechanism was the only force at play.

Foreign Exchange Risk Hedging, Corporate Governance and Financial Performance: Evidence From Kenya

Globalization, Kenya’s floating foreign exchange rate regime, and international trade have exposed Kenyan firms to foreign exchange risk. Empirical studies have demonstrated that hedging minimizes cash flow volatility, hence enhancing financial performance. The management of these risks is critical in overall financial management, since its helps increase the financial performance and the overall returns earned by investors. Understanding factors that influence foreign exchange risks hedging is a crucial step to the effectiveness of the overall risk management process. Against this background, this study sought to evaluate the effects of foreign exchange risk hedging, corporate governance and the financial performance of listed companies in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used longitudinal research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance. The study also revealed that corporate governance, moderates the relationship between foreign exchange risk hedging and financial performance. In the light of this findings, management should explore the whole repertoire of risk amelioration techniques, particularly those available in the roster of innovative techniques of hedging. In order to take full advantage of such techniques, however, the regulator and the securities exchange must lead from the front by introducing cutting-edge financial instruments. In addition firms should endeavor to strengthen corporate governance which enhances the effectiveness of risk management. Keywords: Foreign Exchange risk, Hedging Techniques, Corporate Governance. DOI : 10.7176/RJFA/10-5-08 Publication date :March 31 st 2019

Effect of Foreign Exchange Risk Hedging Techniques on Financial Performance of Listed Firms in Kenya

The adoption of floating foreign exchange rate regime in the 1990s and international trade have led to increased exposure of Kenyan firms to foreign exchange risk. Foreign exchange risk can affect a firm’s expected cash flows, and by extension, its financial performance. This paper examines the effects of foreign exchange risk hedging techniques on the financial performance of publicly listed firms in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used panel data research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance. This implies that when hedging strategies and hedging tools are implemented appropriately, they help firms achieve their financial objectives, increasing financial performance, hence creating value for shareholders.

The Impact of Mandatory Governance Changes on Financial Risk Management

Using the Sarbanes-Oxley Act of 2002 as a quasi-natural experiment to identify the impact of corporate governance reform on foreign exchange risk hedging, we find that the substantial improvements in governance standards increased derivatives hedging and reduced foreign exchange exposure. The results are robust whether we consider initial reform gap or actual implementation, focus on legally required governance measures or include voluntary concomitant reforms. The economic magnitude of the effect is large. Our findings are corroborated by cross-sectional evidence, showing that firms with larger foreign markets exposure and a larger distortion in CEO incentives react more strongly to the reform. Financial hedges are implemented rapidly whereas exposure measures that encompass operational hedges take more time to adjust.

The Effects of Exportation, Foreign Exchange Risk Hedging and Ownership Structure on Firms’ Performance

The Effects of Exportation, Foreign Exchange Risk Hedging and Ownership Structure on Firms’ Performance

Determinants of corporate foreign exchange risk hedging

Purpose– The purpose of this study is to delineate the factors influencing the use of financial derivatives by non-financial firms in managing their exchange rate exposure. In total, 219 non-financial firms are surveyed in regard to their financial hedging decision.Design/methodology/approach– This study is conducted via a survey and the questionnaires were sent to the treasurers and financial controller of the firms. Descriptive analysis is employed to assess the profiles of the respondents. Then, factor analysis is carried out to determine the factors influencing the use of financial derivatives in Malaysia.Findings– The results indicate that the hedging decision of non-financial firms is influenced by their assertive level toward the market and regulators and also how flexible they are for derivative instruments. The intellectual capability that firms acquire to perform hedging strategies is also vital in influencing them to make hedging decision.Practical implications– The insights of this survey would assist and prepare firms to hedge their exchange rate risk by employing financial derivatives. Knowing the influences of firms' adoption of currency derivatives would allow policy makers to formulate their policies in boosting the liquidity of Malaysian derivative market.Originality/value– This study presents findings on the factors influencing the execution of financial hedging by non-financial firms in Malaysia. Survey data are used to seek for the feedback from the market players in order to provide empirical evidence on the corporate use of financial hedging.

Hedging International Foreign Exchange Risks via Option Based Portfolio Insurance

This paper proposes an option-based portfolio insurance method for international foreign exchange risk hedging. Each investor is assumed to maximize the expected utility of his/her portfolio which includes international risky assets and foreign currency index derivatives. The optimal investment is determined for quite general utility functions and hedging constraints. Our results show how and why foreign currency derivatives should be introduced in the investment portfolio to hedge currency risks. The main conclusion of the paper is that new types of options which combine both equity assets and foreign currency derivatives should be used, contrary to the current practice which considers two separate option markets.

Foreign exchange risk hedging in the context of speculative revaluation attacks

PurposeThe purpose of this paper is to propose predictive models of speculative revaluation attacks, which would facilitate currency risk hedging in emerging and developed countries.Design/methodology/approachThe purpose of this paper is achieved using the methodology of multiple triangulation. Paper combines different theoretical perspectives (three generations of speculative attack models), two sources of data (emerging countries and developed countries) and three methods (logit regression, probit regression and artificial neural networks, ANN) for identification of leading indicators and forecasting of speculative attacks. Combination of multiple observations (data), underlying theories and methods allowed achieving least biased results.FindingsA list of leading indicators of speculative revaluation attacks was generated based on previous researches and three generations of speculative attacks' models. Qualitative and quantitative differences of speculative revaluation attacks in emerging and developed countries were identified. The decision matrix of currency risk hedging in the context of speculative devaluation and revaluation attacks was proposed.Research limitations/implicationsAlthough the sample of this researcher includes a wide range of countries (65 in total), their separation into developed and emerging countries is arbitrary (in the course of 35 years some countries have changed the status from emerging towards developed). The initial list of leading indicators is limited, includes mostly economic variables. It could be improved by encompassing political variables, credit ratings, consumer and business confidence indices.Practical implicationsDeveloped predictive models of speculative revaluation attacks may significantly reduce important element of risk – uncertainty – and, consequently, the cost of financial hedging.Originality/valueThis paper is one of the first public attempts to apply alternative methodology of ANN for forecasting speculative attacks. The results showed that latter method is more accurate than probit and logit regressions. Also, to the author's best knowledge, this is a first public attempt to separately analyse the phenomenon of speculative revaluation attacks.