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Can the use of foreign currency derivatives explain variations in foreign exchange exposure? Evidence from Australian companies

Nguyen, Hoa and Faff, Robert 2003, Can the use of foreign currency derivatives explain variations in foreign exchange exposure? Evidence from Australian companies, Journal of multinational financial management, vol. 13, no. 3, pp. 193-215.

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Title Can the use of foreign currency derivatives explain variations in foreign exchange exposure? Evidence from Australian companies
Author(s) Nguyen, Hoa
Faff, Robert
Journal name Journal of multinational financial management
Volume number 13
Issue number 3
Start page 193
End page 215
Publisher Elsevier Science BV
Place of publication New York, N.Y.
Publication date 2003-07
ISSN 1042-444X
Keyword(s) foreign currency derivative use
foreign currency exposure
Summary We investigate the role of foreign currency derivatives (FCD) in alleviating foreign exchange rate exposure of Australian firms. While there is some evidence that the use of FCD reduces the level of ex-post short-term exposure, such an effect is absent with regard to the degree of foreign operations. Our results support the view that FCDs are used to hedge existing exchange rate exposures and that Australian firms, generally, are extensively exposed to currency fluctuations in the long run. While monthly exposure appears to be a function of a firm's size and financial hedging, exchange rate exposure of shorter horizons (1 and 3 months) appears to be negatively related to a firm's price earnings ratio (proxying growth opportunities)—thereby supporting the ‘underinvestment’ hypothesis. Further, the exposure of longer horizons (12 and 24 months) is positively related to a firm's liquidity, supporting the view that liquidity is a substitute for hedging.
Language eng
Field of Research 150201 Finance
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2003 Elsevier Science B.V.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30004328

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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