Financial derivatives in the South African mining industry

The purpose of this research was to identify factors which influence thedecision to use financial derivatives in the South African mining industry andthen to establish their importance to the industry.The research incorporated both qualitative and quantitative primary researchphases. The qualitative survey formed the questionnaire framework for thequantitative phase. The quantitative survey formed the bulk of the analysis,and both mean rank tests and factor analysis were employed to interpret thedata.Thirteen factors, influencing the decision to use financial derivatives, wereidentified. However, statistically significant mean rank tests (where p < 0.05)indicated that, out of the initial thirteen factors, the South African miningindustry viewed the following to be the most important:1. Change the Volatility of Cash Flows2. Improve Value of the Firm3. Change the Volatility of Accounting Earnings4. The Size of the Firm5. The Perceptions of Derivatives Use by Investors, Regulators and thePubliciiiIt was also found that combinations of factors, rather than individual factors,influence the decision to use derivatives. Therefore, a factor analysis wasconducted to identify these various combinations.The analysis yielded seven broadly defined combinations of factors whichincorporated the top five factors and were able to explain most of the varianceobserved from the original thirteen factors. These seven combinations were: Perceptions and External Finances Cost of Capital and the Value of the Firm Volatility of Accounting Earnings Size of Firm Availability of Information Financial Distress Political and Country InstabilityFurthermore, outputs indicated that the use of financial derivatives and therelative importance of factors in terms of derivative usage may be influencedby factors other than those discussed in this research.