The corporate use of derivatives: a survey of South Africa’s large listed non-financial firms

Abstract

This paper presents the results of a comparative questionnaire survey of derivative use by South African companies. The objective was to determine the extent of derivative use and to examine how and why companies use derivatives. Derivative use by South African companies compares favourably to the level of derivative use in developed countries. The risk most often hedged is currency exposure followed by interest rate risk. Commodity producers tend to hedge commodity price risk. Companies mainly use forwards to hedge exchange rate risk whilst swaps dominate in the hedging of interest rate risk. Companies mainly use derivatives to hedge contractual obligations and rarely use derivatives to take a view on market movements. Concerns relate to transaction costs, investor perceptions, and credit and liquidity risks. Companies indicated that they would, if permitted, hedge expected as compared to actual future currency exposure. KEY WORDSDerivatives, hedging, currency exposure, interest rate risk, forwards and swaps Contact arete@telkomsa.net and carlos.correia@uct.ac.za

The corporate use of derivatives by listed non-financial firms in Africa

“…This difference in derivative use is placed in stark contrast in Figure 2. This study found further that the percentage of companies using derivatives for South Africa is significantly lower than that recorded by Correia et al (2012) and Modack, et al (2012) which reported derivative use at a rate of 90% and 93% respectively. This difference in derivative use is mostly explained by the fact that the sample of companies used in the Correia et al (2012) and Modack, et al (2012) surveys were made up of the 100 largest JSE listed companies, whereas this study analysed derivative use by all listed companies in South Africa and therefore includes many smaller companies.…”

“…Whilst Sprcic 2007 Bodnar et al ( and 2003 and Correia et al (2012) found OTC Forwards to be the most preferred instrument for the management of foreign exchange exposure, Alkeback and Hagelin (1999) found that firms in Sweden use a wider range of instruments to manage currency exposure and companies use OTC Forwards, Exchange-traded Forwards, Swaps and Futures. The most preferred instruments to manage currency risks in Malaysia is cited as OTC Forwards (Ameer et al 2011) and this is due to the greater flexibility of Forward foreign-exchange contracts (which are available from licensed local banks) over other standardized foreign-exchange Options and Futures contracts.…”

“…Across all studies the most favoured derivative instrument for the management of interest rate exposure tended to be Swaps. Studies reported a significant growth in the use of swaps to manage interest rate risk exposure (see Bartram et al 2004;Correia et al 2012).…”

“…This is mainly true for Africa (excluding South Africa) whilst for South Africa there is a slightly greater focus on hedging interest rate risk (20%) as compared to commodity price risk (19%). The studies by Correia et al (2012) and Modack et al (2012) indicated that a significantly greater number of South African companies were involved in the hedging of interest rate risk as compared to commodity price risk. However, their results apply to the largest 100 companies whilst this study includes all listed JSE companies and therefore includes a greater proportion of smaller listed companies.…”

“…An objective of this study is to understand the extent to which the use of derivatives by companies in Africa compares with the use of derivatives in other countries; however there are some limitations attached to such a comparison. Sprčić (2007), Jalivland (1999) and Correia et al (2012) point out that the timing of the studies may have an impact on any comparative analysis of results. Comparisons are more meaningful between studies that have been carried out over the same period or in periods that are as close as possible to each other.…”