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

Dr. Naveed Iqbal Chaudhry, Mian Saqib Mehmood and Asif Mehmood

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Corporate Hedging; Derivatives; Risk Management; Foreign Exchange Derivatives; Interest Rate Derivatives; Pakistan. (search for similar items in EconPapers)
JEL-codes: F23 F30 G32 (search for similar items in EconPapers)
Date: 2014-07-22, Revised 2014-07-26
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (4)

Published in Wulfenia Journal 7.21(2014): pp. 293-310

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