Financial derivatives use and multifaceted exposures

Abstract

Purpose The purpose of this paper is to assess the effect of financial derivatives use on different exposures by comparing domestic firms, domestic multinational corporations (MNCs) and affiliates of foreign MNCs using a unique hand-collected data set of derivatives activities from 881 non-financial firms in eight East Asian countries over the period of 2003-2013. Design/methodology/approach In this paper, the authors apply a two-stage approach. In the first stage, exposures to country risks, exchange rate and interest rate risks are estimated by using the market model. In the second stage, potential effects of firms’ derivatives use on multifaceted exposures are investigated by carrying out pooled regression model, and panel data regressions with random effect specifications. Findings The authors provide novel evidence that financial hedging of domestic firms and domestic MNCs reduces exposure to home country risks by 10.91 and 14.42 percent per 1 percent increase in notional derivative holdings, respectively, while affiliates of foreign MNCs fail to mitigate exposure to host country risks. The use of foreign currency and interest rate derivatives by domestic firms and domestic MNCs is effective in alleviating such firms’ exposures to varied degrees, while foreign affiliates’ use of derivatives can only lower interest rate exposures. Originality/value The primary theoretical contribution of this study is applying the market model to estimate exposures to home and host country risks. Regarding empirical contributions, the authors provide strong evidence that the use of financial derivatives by domestic firms and domestic MNCs significantly contributes to a decline in exposure to home country risks, and evidence the outperformance of domestic MNCs vis-à-vis domestic firms and foreign affiliates.

Berbahayakah Instrumen Derivatif Dalam Konteks Akuntansi?

“…Angka R2 mengindikasikan fluktuasi pada nilai item yang dilindungi yang dapat dijelaskan oleh perubahan nilai ins trumen derivatif. Penggunaan ukuran R2 sebagai indikasi ukuran efektifitas lindung nilai mengharuskan pihak yang melakukan lindung nilai (hedger) menggunakan angka slope koefisien sebagai porsi penentuan nilai instrumen derivatif dalam melindungi transaksi/ item yang dilindung nilai (Bezzina & Grima, 2012;Kawaller & Koch, 2013;Nunez, 2012;Trang, 2018).…”

Capital expenditures, corporate hedging and firm value

“…Two decades ago, Warren Buffett declared derivatives as "financial weapons of mass destruction" (Buffett, 2002). Although multinational corporations have reaped the benefits of internationalization by exploiting the use of derivatives to lower their systematic risk, idiosyncratic risk, and total risk (Trang, 2018), the legislators, policymakers, and regulators failed to identify and manage the systemic risk (Schwarcz, 2008) linked with the use of derivatives. After the financial crisis in 2008, US and European officials started to regulate the use of derivatives through collaterals and margin requirements.…”

Panel Method in Hedging: Evidence from The Indonesian Agricultural Sector

“…Hedging with derivative instruments is very useful for companies conducting transactions in foreign currencies (Trang, 2018). Derivative financial markets bring together those who want to protect their assets from the risk of loss due to price changes with those willing to bear the risk of price changes (Bezzina & Grima, 2012).…”