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

Hoa Nguyen, Robert Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

44 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)193-215
Number of pages23
JournalJournal of Multinational Financial Management
Volume13
Issue number3
DOIs
Publication statusPublished - Jul 2003
Externally publishedYes

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