Authors: Dr. B. Charumathi and Dr. B. Charumathi
This paper models the factors which determine the foreign exchange derivative usage by Indian non financial companies. A sample of 460 companies was studied. It is found that out of 460 companies, 186 firms did not use derivatives to hedge their foreign exchange risk and the remaining 273 companies hedged their foreign exchange risk using derivatives. However, out of the 273 companies, only 70 companies in 2007, 111 companies in 2008, 97 companies in 2009 and 84 companies in 2010 disclosed the foreign exchange derivatives notional values.This study uses unbalanced panel data for four years from 2007 to 2010 and applies multiple regression model. For this purpose, the firm specific characteristics such as financial distress cost, under investment cost, multinationality, economies of scale, firm size and agency variables are regressed against the notional amount of foreign exchange derivatives reported for hedging activities. Very interesting results came out of this study in the Indian context. It is found that smaller firms use more of foreign exchange derivatives. It was also found that there is a negative relation between debt ratio and foreign exchange derivative usage. It shows that in India, foreign debt may be acting as a substitute for foreign exchange hedging. The results show that the determinants of foreign exchange derivative usage in emerging economies may be very different from that of the developed countries.
Keywords: Foreign Exchange derivatives, Financial Distress,Underinvestment, Size, Multinationality