Foreign exchange risk exposure of listed companies in South Africa
Date
2014-07-22
Authors
Molele, Mashukudu Hartley
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Abstract
The increased international participation of South African firms not only presents opportunities, but also exposes South African firms to foreign exchange risk. The study investigated the association between unanticipated changes in exchange rates and excess returns of firms listed on the JSE, as a method of assessing the levels of foreign exchange risk exposure of nonfinancial firms in South Africa, both for the pre- and post-2008 ZAR currency crisis.
All share price data, exchange rates data, and 3-month T-bill rates data were collected from I-Net Bridge. Levels of exposure to foreign exchange risk were measured through the augmented market model of Jorion (1990).
The results from this study report levels of foreign exchange risk exposure of nonfinancial firms listed on the JSE as 34.4%, 33.3%, and 37.8% for the US$, GBP, and the euro respectively, for the full period i.e. July 2002 to July 2013 . The results show that nonfinancial firms listed on the JSE have a higher incidence of negative foreign exchange exposure across all three dominant currencies regardless of the period used to run the model. The post-2008 crisis period reported significantly lower levels of foreign exchange exposure, and a higher incidence of positive levels of foreign exchange exposure, than in the pre-2008 currency crisis period.
The key message of the study is that exposure levels in South Africa in the post-2008 currency crisis period are significantly different to those levels in the pre-2008 crisis period. This means therefore that corporate treasury managers should review their hedging policies in the light of the changed external environment. The other message is that contrary to earlier studies that identified the US$/ZAR as the most important source of foreign exchange risk, this study established that the euro/ZAR is the more dominant source of foreign exchange risk in the South African market.
Description
MBA Thesis
Keywords
Johannesburg Stock Exchange., Hedging (Finance), Foreign exchange market -- South Africa.