Use Of Foreign Currency Derivatives Research Articles

Corporate risk management: An empirical evidence on foreign currency derivatives’ use by Malaysian nonfinancial firms

During the last decade, the issue of using financial hedging instruments get attention of top management specially of nonfinancial firms due to the increase in cross-border trade and variations in foreign exchange rates. As Malaysia is an open economy with high exchange rate fluctuations, this study test different corporate hedging theories in the Malaysian context and investigated factors that can better explain the use of foreign currency derivatives. We found weak evidence for underinvestment theories as well as ‘Risk Management Committee’, but strong evidence for financial distress theories. We also find support for size and market-openness hypothesis but weak support for the liquidity hypothesis. However, in the robustness test, all proxies of underinvestment theory and Risk Management Committee is found to be significant when the model is run after excluding SIZE variable. Finally, our results run counter to the conjecture that high exchange rate exposure firms are more inclined towards derivative usage.

Financial derivatives and firm value: What have we learned?

Despite an enormous amount of research on the relationship between financial hedging and firm performance, the literature provides so far no clear-cut findings on whether the use of derivatives results in higher firm valuation. Using a meta-analysis of 51 studies, this research explains whether the absence of a consensus is due to different country specificities and hedging types. The findings show that the use of foreign currency derivatives, alone or along with other types of derivatives, drives firm value positively. They also show that hedging presents an economic advantage for all firms, especially those from common law and developed countries.

Does the CEO elite education affect firm hedging policies?

This paper studies the relationship between CEO elite education and firm hedging decisions. It uses the particular specificities of the French post-secondary educational institutions to examine the effect of CEO educational background on the use of foreign currency derivatives. The results show a positive and significant relationship between education quality and derivatives use. Neither the level nor the type of education has any significant effect. The results also show that the use of derivatives enhances firm performance only when CEOs are from elite institutions. These results are robust to a battery of tests that involve alternative estimation techniques, the use of different subsamples, additional control variables, and control for endogeneity and selection bias.

Foreign currency risk hedging and firm value in China

The objective of our study is to investigate the association between the use of foreign currency derivatives and corporate value among Chinese firms by examining listed firms’ quarterly data from 2000 to 2013. We find that Chinese firms that engage in hedging activities with derivatives to reduce their foreign exchange exposure tend to have higher corporate value. This finding is shown to be consistent through a series of robustness tests. We also find that the incidence of such effects is higher among firms with greater profitability and investment opportunities. The use of foreign currency derivatives exerts a more prominent impact on firm value when the exchange rate depreciates and when the economy is booming. However, the link between derivative use and firm value is weaker during crisis periods. Moreover, an industrial analysis demonstrates that the value-enhancing effect varies across industries.

Foreign Currency Derivatives and Firm Value: Evidence from New Zealand

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.

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.

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.

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.

Foreign currency derivative use and shareholder value

This paper investigates the effect of foreign currency (FC) derivative use on shareholder value. Exposures are broken down by currency, by whether the currency is appreciating or depreciating and by whether exposures are symmetric or asymmetric. We find that derivatives are effective in reducing overall FC exposure but there is no evidence of value creation through the application of a program that identifies and targets only loss causing exposures. We also find that FC derivative use has no significant effect on firm value in the overall sample and when the sample is broken down by exposure type and derivative product.

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.

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.

O uso de derivativos da taxa de câmbio e o valor de mercado das empresas brasileiras listadas na Bovespa

Este trabalho examina o impacto da utilização de derivativos de moedas no valor de mercado da firma, a partir de amostra das 48 empresas não-financeiras mais líquidas listadas na Bolsa de Valores de São Paulo, abrangendo o período de 1999 a 2007. Com base no trabalho de Allayannis e Weston (2001) e Rossi (2008), foram utilizadas três medidas do índice Q de Tobin como aproximação do valor da firma. Na regressão do modelo, utilizaram-se três métodos: pooled OLS, modelo de efeito fixo e modelo de efeito aleatório. Em seguida, é testada a causalidade reversa e a causalidade direta entre o uso de derivativos cambiais e o valor de mercado da firma. Os resultados empíricos encontrados demonstram que não há evidência de que o uso de derivativos de moedas está associado ao valor de mercado da firma. Nas regressões em pooled OLS, a hipótese de que o uso de derivativos cambiais aumenta o valor de mercado da firma foi aceita, porém estatisticamente não-significante. Já nas regressões de efeito fixo e efeito aleatório, a mesma hipótese não foi aceita e os resultados são estatisticamente significantes. Por fim, encontraram-se evidências de que tanto as empresas que iniciam o uso de derivativos de moeda quanto aquelas que deixaram de usar esses instrumentos, experimentam aumento de valor ao longo do tempo.

Exchange Rate Risk Management: Evidence from East Asia

The recent East Asian financial crisis provides a natural experiment for investigating foreign exchange risk management by nonfinancial corporations. During this period, the financial crisis exposed local firms to large depreciations in exchange rates and reduced access to foreign capital. The authors explore the exchange rate hedging practices of firms that hedged exposure to foreign debt in eight East Asian countries between 1996 and 1998. They identify and characterize East Asian companies that used foreign currency derivatives, documenting differences in size, financial characteristics, and exposure to domestic and foreign debt. They investigate the factors improtant in the use of foreign currency derivatives. Unlike studies of US firms, they find limited support for existing theories of optimal hedging. Instead, they find that firms use foreign earnings as a substitute for hedging with derivatives. And they find evidence that firms engage inselectivehedging. They investigate the relative performance of hedgers during and after the crisis. They find no evidence that East Asian firms eliminated their foreign exchange exposure by using derivatives. Firms that used derivatives before the crisis performed just as poorly as nonhedgers during the crisis. After the crisis, firms that hedged performed somewhat better than nonhedgers, but this result appears to be explained by a larger post-crisis currency exposure for hedgers (an exchange rate risk premium), which had limited access to derivatives during this period.

Corporate Governance and the Hedging Premium Around the World

This paper examines the use of foreign currency derivatives (FCDs) as a proxy for risk management and its potential impact on firm value in a broad sample of firms from thirty-nine countries between 1990 and 1999. Our sample allows us to exploit differences in corporate governance across firms and countries, their impact on risk management policies and their value implications. We find that on average, hedging is associated with higher firm value around the world and that corporate governance is an important factor in assessing the value of risk management. The hedging premium is statistically significant and economically large for firms with strong internal corporate governance (such as those with an institutional blockholder) and those which reside in countries with strong external governance (such as those with an English legal origin), and insignificant for firms with weak internal governance and those which reside in countries with weak external governance. Finally, hedging is (not) valuable even when internal corporate governance is weak (strong), if the firm happens to reside in a country with strong (weak) external governance. Overall, our findings suggest that both firm-level and country-level corporate governance play a significant role in understanding when risk management is associated with higher value. Moreover, our results imply that risk management is one channel through which stronger corporate governance translates into higher firm value.

O Uso de Derivativos Cambiais pelas Empresas Brasileiras: uma Investigação Empírica

Este artigo estuda o uso de derivativos de moeda para uma amostra de empresas brasileiras não-financeiras de 1996 a 2004. O trabalho verifica que algumas das hipóteses apresentadas pela teoria do hedging ótimo são capazes de explicar a decisão acerca da utilização e o volume de derivativos utilizados pelas firmas brasileiras. Além disso, o estudo mostra que o ambiente macroeconômico e fatores específicos do país não analisados na literatura empírica existente também são importantes na determinação da política de gerenciamento de risco das empresas e que o uso de derivativos de moeda tem um impacto na decisão das firmas sobre sua estrutura de capital e composição da moeda de sua dívida.

Exchange rate exposure, foreign currency derivatives and the introduction of the euro: French evidence

We investigate the impact of the introduction of the Euro on exchange rate exposures for French corporations and examine the corporate use of foreign currency derivatives to hedge exchange rate exposure post-Euro. Our findings indicate that the introduction of the Euro is associated with both a reduction in the number of firms that have significant exchange rate exposure and the absolute size of exposure. Consistent with these reduced exposures, French firms use foreign currency derivatives less intensively. Furthermore, the use of foreign currency derivatives is found to be associated with lower exchange rate exposure but there is insufficient evidence that these instruments are more effective in the post-Euro environment.

Investigating the Determinants of the Decision to Engage In a Corporate Hedging Strategy

This paper investigates the decision to engage in a comprehensive corporate hedging strategy for Australian listed companies. Specifically the pursuit of a comprehensive hedging strategy is gauged by jointly investigating the corporate use of foreign currency derivatives; interest rate derivatives; commodity derivatives and foreign debt. The results show that firm size, leverage, dividend yield and block holdings are incentive factors to the comprehensive hedging decision, while executive shares is a disincentive factor. Consistent with hedging theory, the significance of the leverage variables supports the financial distress cost hypothesis. Support is also found for the dividend decision is a substitute for corporate hedging.

Exchange Rate Exposure, Foreign Currency Derivatives and the Introduction of the Euro: French Evidence

In this paper, we investigative the impact of the introduction of the Euro on exchange rate exposures and the subsequent hedging practices of a sample of French corporations. Our findings indicate that the introduction of the Euro led to both a reduction in the number of firms that have significant exchange rate exposure and the absolute size of exposure. In response to these reduced exposures, French firms tend to use foreign currency derivatives less intensively although there has been no change in the number of firms that make use of the instruments. Furthermore, the use of foreign currency derivatives is found to be effective in managing exchange rate exposure but there is insufficient evidence that these instruments are more effective in post Euro periods.

Managing Foreign Currency Risk with Derivatives: Evidence from UK Non-Financial Firms

The paper reports the results of an empirical study into the foreign exchange risk management of large UK non-financial corporations. Using a sample of FT UK 500 non-financial firms for 1999, I examine the impact of currency derivatives on firm exchange-rate exposure, the factors that prompt corporations to hedge, and the factors that affect their decision on how much to hedge. I find a strong negative association between foreign currency derivative use and firm exchange-rate exposure, suggesting that firms use derivatives as a hedge rather than to speculate in the foreign exchange markets. The evidence also shows that a firm's currency exposure through foreign operations and import/export activity is a very important factor that prompts firms to hedge. And the size of the firm is positively related to the foreign currency hedging decision, indicating that larger firms are more likely to hedge than smaller firms.

Can the use of foreign currency derivatives explain variations in foreign exchange exposure?: Evidence from Australian companies

We investigate the role of foreign currency derivatives (FCD) in alleviating foreign exchange rate exposure of Australian firms. While there is some evidence that the use of FCD reduces the level of ex-post short-term exposure, such an effect is absent with regard to the degree of foreign operations. Our results support the view that FCDs are used to hedge existing exchange rate exposures and that Australian firms, generally, are extensively exposed to currency fluctuations in the long run. While monthly exposure appears to be a function of a firm's size and financial hedging, exchange rate exposure of shorter horizons (1 and 3 months) appears to be negatively related to a firm's price earnings ratio (proxying growth opportunities)—thereby supporting the ‘underinvestment’ hypothesis. Further, the exposure of longer horizons (12 and 24 months) is positively related to a firm's liquidity, supporting the view that liquidity is a substitute for hedging.