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

journal contribution
posted on 2003-07-01, 00:00 authored by Hoa NguyenHoa Nguyen, R Faff
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.

History

Journal

Journal of multinational financial management

Volume

13

Issue

3

Pagination

193 - 215

Publisher

Elsevier Science BV

Location

New York, N.Y.

ISSN

1042-444X

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2003 Elsevier Science B.V.

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