Determinants of corporate hedging policies and derivatives usage in risk management practices of non-financial firms

Chaudhry, Dr. Naveed Iqbal and Mehmood, Mian Saqib and Mehmood, Asif (2014): Determinants of corporate hedging policies and derivatives usage in risk management practices of non-financial firms. Published in: Wulfenia Journal , Vol. 21, No. 7 (24 July 2014): pp. 293-310.

Abstract

Derivatives are the major icon among risk management practices. Firms usually use derivatives to hedge their foreign exchange and interest rate risk. This study aims to examine the determinants’ of corporate hedging policies and derivative usage in risk management particularly with respect to Pakistan, as the political and economic conditions in Pakistan are highly volatile which intends the corporations to handle and mitigate their risk through channelizing the derivatives. Secondary data of 75 non financial firms listed in Karachi Stock Exchange was collected over the period 2007-2011 – to regress empirically – for achieving the aim of this study. Mann-Whitney U test was used to distinguish the derivative user and non user. Findings of this test characterize users as large size, higher growth opportunities, cash flow volatility, foreign exchange and interest rate exposure. Moreover this study finds that there is a significant relationship between the use of derivatives and foreign purchase, liquidity, firm growth and size. Our findings suggest that derivative users have competitive edge over the non user, as they get economies of scale and proper risk management through using these kinds of derivative instruments.

• Item Type: MPRA Paper
• Language: English
• Keywords: Corporate Hedging, Derivatives, Risk Management, Foreign Exchange Derivatives, Interest Rate Derivatives, Pakistan.
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; F - International Economics > F3 - International Finance > F30 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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