Characteristics of South African firms that hedge against foreign exchange risk
Increased globalisation of international business and operations results in anincrease of firms facing foreign exchange risk. One of the ways to mitigate this riskis the use of currency derivatives to hedge this foreign exchange exposure. Thisresearch explores the characteristics of South African firms that use currencyderivatives in contrast to those that do not.The data is collected and calculated from financial statement of firms listed on themain board of the JSE. The variables are tested using t-tests to accept or reject thehypothesis.There are five characteristics which are tested, level of foreign exchange exposure,firm size, propensity to bankruptcy, underinvestment in growth opportunities andlevel of managerial ownership.The findings for the theories on bankruptcy costs and managerial ownershipaffecting a firm?s decision to hedge are consistent with previous literature indicatingthat these characteristics are not significant in determining a firm?s policy on hedging.The literature also supports the test results for the theory on firm size and level offoreign exposure, stating that the larger firms and those with higher levels of foreignexposure are more likely to hedge their foreign exchange risk with the use ofcurrency derivatives.In conflict with international trends high growth opportunities is not seen assignificant within the South African context.The key finding is that firm size and level of foreign exchange are the prominentcharacteristics in the South African context when describing whether a firm willhedge it?s foreign exchange exposure with currency derivatives or not
Year of publication: |
2012-01-19
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Authors: | Arnold, Katherine |
Subject: | Foreign exchange risk | Derivatives | Hedge funds |
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