Characteristics of South African firms that hedge against foreign exchange risk
Date
2012-01-19
Authors
Arnold, Katherine
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Abstract
Increased globalisation of international business and operations results in an
increase of firms facing foreign exchange risk. One of the ways to mitigate this risk
is the use of currency derivatives to hedge this foreign exchange exposure. This
research explores the characteristics of South African firms that use currency
derivatives in contrast to those that do not.
The data is collected and calculated from financial statement of firms listed on the
main board of the JSE. The variables are tested using t-tests to accept or reject the
hypothesis.
There are five characteristics which are tested, level of foreign exchange exposure,
firm size, propensity to bankruptcy, underinvestment in growth opportunities and
level of managerial ownership.
The findings for the theories on bankruptcy costs and managerial ownership
affecting a firm’s decision to hedge are consistent with previous literature indicating
that 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 of
foreign exposure, stating that the larger firms and those with higher levels of foreign
exposure are more likely to hedge their foreign exchange risk with the use of
currency derivatives.
In conflict with international trends high growth opportunities is not seen as
significant within the South African context.
The key finding is that firm size and level of foreign exchange are the prominent
characteristics in the South African context when describing whether a firm will
hedge it’s foreign exchange exposure with currency derivatives or not
Description
MBA thesis - WBS
Keywords
Foreign exchange risk, Derivatives, Hedge funds