Foreign Currency Derivatives and Firm Value

Abstract

The corporations, all over the world, are using derivative instruments to hedge their Exchange Rate exposure arises from increased globalization and market determined Exchange Rates. Despite of this, most of the studies explore the impact of Foreign Currency Derivative (FCD) usage and extent of such usage on firm value in developing countries, whereas very few examines this relationship in developing countries. Current study, therefore, attempts to examine the relationship between FCD instruments and firm value by using the data of 181 Pakistani non-financial firms for the period 2004-2010. Controlling firm specific variables, empirical findings support value increasing effects of usage and extent of such derivative usage. Detailed analysis indicates that corporations with exchange rate exposure, measured by Foreign Sales, can enhance their firm value by using FCD instruments. The findings remain same for alternative specifications like endogeneity and self-selection problem, that use of FCD instruments gives value premium effects on Pakistani firms.