Financial hedging strategies of South African multinational corporations: an exploratory analysis

Abstract

Corporate risk management is an important element of a firm’s overall business strategy. Hedging in its various implementations forms an integral part of the firm’s corporate risk management. The main objectives of the study are to develop an overview of the financial hedging framework implemented by South African Multinational Corporations (SAMNC) using a corporate survey and to evaluate the hedging determinants for the use of complex derivatives as well as to evaluate the hedging determinants of the firm value using an ordinary least square regression. The comparison between our survey results, the survey results of South African firms by Lebata (2018) and the global survey results by Deloitte and Citi Bank shows that the South African Multinational Corporations’ hedging strategies and operations are very similar to the global hedging strategies and experiences. Due to the lack of skills in local operations, the South African Multinational Corporations have concentrated the treasury functions at the headquarters and the policies are developed centrally. The main difference is that the South African Multinational Corporations are more risk a verse when evaluating and using derivative instruments. Mainly forwards with tenures up to 12 months are used. Only one South African Multinational Corporation used complex derivatives. But the firms adhere to the strict framework developed by the South African regulatory authorities and international standards. Surprisingly, we found a mismatch between the product portfolio offered by South African financial institutions and the hedging requirements of the surveyed firms. The financial institutions offer spots, forward, futures, swaps and options. Generally, South African Multinational Corporations do not require or use options and futures for developing currencies. We conclude that there is a great potential to expand the use of the available products, but it requires substantial education of the treasury departments. The results of the regression for the use of complex derivatives (UCD and CPX) show a positive significance at the 5% level for the determinant long-term debt to total assets (LTAS). LTAS describes the financial distress level. The remaining determinants do not show any significant influence on the use of derivatives. Whilst not significant, the positive sign of the determinant ‘use of complex derivatives’ (UCD) of the dependent variable market-to-book ratio (MB) representing firm value would indicate that the use of complex derivatives increases the firm value compared to the use of simple, plain vanilla derivatives. This is similar to previous studies which compared firms not using derivatives at all with firms using derivatives.