Derivatives Usage in Non-Financial Firms

Authors

  • Mohamad Hanapi Mohamad Faculty of International Studies, Universiti Utara Malaysia, Malaysia
  • Mohd Faizal Mohd Amin Faculty of International Studies Universiti Utara Malaysia, Malaysia

DOI:

https://doi.org/10.32890/jis2005.1.4

Abstract

Derivatives are commonly used by financial firms in order to protect themselves from unforeseen losses due to currency fluctuations. The degree of usage should demonstrate the equivalent level of risk the firms intend to cover, hence the bigger the foreign exchange exposure, the bigger the coverage. This study attempted to describe derivative usage in non-financial firms. Cross section data from developed and developing countries were used to assess the degree of usage. The findings revealed that while in developed countries the usages are very rigorous, derivatives are also becoming popular in developing countries. The reason for the usage also indicated similarity between developed and developing countries.

 

References

Abdul Majid, M. M., 1996, ‘The Success of Derivatives Markets in Malaysia: Opportunities & Challenges Ahead’, Securities Commission Bulletin, Kuala Lumpur, 4" Quarter, 1996-68 - - Journal of International Studies - J December 2005

Abdullah, F. A. and Feay, W. F., 2001, ‘Impact of new derivative disclosures on multinational firms’ financing strategies’, Multinational Business Review, Detroit, Spring 2001, vol. 9, no.1, pp. 1-8

Adedeji, A. and Baker, R., 2002, ‘Why Firms in the UK Use Interest Rate Derivatives’, Managerial Finance, vol. 28, no. 11, pp. 53-

Alkeback, P., and Hagelin, N., 1999, ‘Derivative Usage by Non financial Firms in Sweden with an International Comparison’, Journal of International Financial Management and Accounting

Allen, F., and Gale, D., 1994, ‘Financial Innovation and Risk Sharing’, Cambridge, MA: MIT Press

Bailly, N., Browne, D., Hicks, E. and Skerrat, L., 2003, ‘UK Corporate Use of

Derivatives’, European Journal of Finance, April 2003, vol. 9, no. 2, pp. 169-194

Baldoni, R., 2001, ‘Financial Risk Management: Journey or Destination ?’, Directorship, June 2001, vol. 27, no. 6, pp. 13-19

Barton, J., 2001, ‘Does the Use of Financial Derivatives Affect Earnings Management Decisions?’, Accounting Review, vol. 76, no. 1, pp. 1-27

Belk, P. A., 2002, ‘The Organisation of Foreign Exchange Risk Management: A Three-Country Study’, Managerial Finance, vol. 28, no. 11, pp. 43-52

Berkman, H. and Bradbury, M. E., 1996, ‘Empirical evidence on the corporate use of derivatives’, Financial Management, Tampa, Summer 1996, vol. 25, no. 2, pp. 5-

Berkman, H., Bradbury, M.E., and Magan, S. (1997), ‘An International Comparison of Derivatives Use’, Financial Management, Winter edition, pp. 69—73

Bodnar, G.M. and Gebhardt, G., 1999, ‘Derivative Usage in Risk Management by US and German Non-Financial Firms: A Comparative Survey’, Journal of International Financial Management and Accounting, vol. 10, no. 3, pp. 153-187

Bodnar, G. M., Hayt, G. S., Marston, R. C., and Smithson, C. W. 1995, ‘Wharton Survey of Derivatives Usage by U.S. Non-Financial Firms’, Financial Management, Tampa, Summer edition, vol.24, no.2, pp. 104-114

Bodnar, G. M., Hayt, G. S., Marston, R. C., and Smithson, C. W. 1998, ‘7998 Wharton Survey of Financial Risk Management by U.S. Non-Financial Firms’, Financial

Management, Tampa, Winter 1998 edition, vol.27, Issue 4, pp. 70-91-69 - Journal of International Studies - duly / December 2005

Bodnar, G.M., Jong, A.D., and Macrae, V., 2003, ‘The Impact of Institutional Differences on Derivative Usage: A Comparative Study of US and Dutch Firms’, European Financial Management, Sept. 2003, vol. 9, no. 3, pp. 271-298

Bossley, L., 2002, ‘A hedge too far’, Petroleum Economist, London, October 2002, vol. 69, no.10, pp. 33-34

Bradley, K., and Moles, P., 2002, ‘The Nature and Determinants of the Economic Currency Exposure of Non-financial UK Firms’, Managerial Finance, vol. 28, no. 11, pp. 1-15

Brewis J., 1999, ‘A Lesson in Forex Hedging’, Corporate Finance, Jun 1999, no. 175, pp. 24-27

Brown, G.W., 2001, ‘Managing Foreign Exchange Risk with Derivatives’, Journal of Financial Economics, Amsterdam, May/June 2001, vol. 60, no. 2/3, pp. 401-448

Bunn, E., 2002, ‘Derivatives and hedging’, Corporate Finance, London, June 2002, no. 211, pp. 5-8 ‘Central banks must watch derivatives’, Business Times-New Straits Times, Kuala

Lumpur, November 21, 2002, pp. B18.

Chan, K. C. and Tam, K., 2002, ‘Foreign Exchange Risk and Firm Value: An Analysis of US Pharmaceutical Firms’, Managerial Finance, vol. 28, no.3, pp. 57-

Chance, D. M., 1998, An Introduction to Derivatives (4" Edition), The Dryden Press, Florida

Copeland, T.E. and Joshi, Y. 1996, ‘Why Derivative don't reduce FX risk’, The McKinsey Quarterly, no.1, pp. 66-79

Cummins, J.D., Phillips, R.D., and Smith, $.D., 1998, ‘The Rise of Risk Management’, Economic Review — Federal Reserve Bank of Atlanta, First Quarter 1998, vol. 83, no. 1, pp. 30-40

De Ceuster, M.J.K., Durinck, E., Laveren, E., and Lodewyckx, J., 2000, ‘A Survey into the use of Derivatives by Large Non-Financial Firms operating in Belgium’, European Financial Management, vol. 6, no. 3, pp. 301-319

Dixon, R. and Bhandari, R.K., 1997, ‘Derivatives, risk and regulation: chaos or confidence ?’, International Journal of Bank Marketing, vol. 15, no. 3, pp. 91-98 Dodd R. 2000, ‘The Role of Derivatives in the East Asian Financial Crisis’, The Financier, vol. 7, no.1-4, pp. 28-44 is Journal of Intert y-Jul December 2005

Dybvig P.H. & Marshall W.J. 1997, ‘The new risk management: The good, the bad, and the ugly’, Review — Federal Reserve Bank of St. Louis, St. Louis, vol. 79, no.6, pp. 9-21

Eiteman, D., Stonehill, A. & Moffett, M. 1998, Multinational Business Finance (8" Edition), Addison-Wesley Publishing Company, Inc.,New York

Enders, W. 1995, Applied Econometric Time Series (1 Edition), John Wiley & Sons, Inc., New York ‘Financial Derivatives Grow Rapidly in Oil and Gas Markets’, Energy User News, April 2003, vol. 28, no. 4, pp. 30-35 ‘Financial Risk Management’, Treasury & Risk Management’, Nov 2001, vol. 11. No. 10, pp. 38-40

Firchild, R. 2002, ‘Financial risk management: is it a value-adding activity?’, Balance Sheet, vol. 10, no. 4, pp. 22-25

Fatemi, A. and Glaum, M., 2000, ‘Risk Management Practices of German Firms’, Managerial Finance, vol.26, no. 3, pp. 1-17 ‘Failed hedging strategy sinks Thakral Corp into the red’, Asiamoney, London, Jul/ Aug 1999, vol. 10, no. 6, pp.8-9

Financial Product Research Group (1996), 1996 Australian Financial Markets Report, AFMA

Gay, G.D. and Nam, J. 1998, ‘The underinvestment problem and corporate derivatives use’, Financial Management, vol. 27, no. 4, pp. 53-

Geczy, C., Minton, B. A., and Schrand, C. 1997, ‘Why firms use currency derivatives’, The Journal of Finance, Cambridge, September 1997, vol. 52, no. 4, pp. 1323-1354

Goldberg, S., Godwin, J.H., Kim, M-S, and Tritschler, C.A., 1998, ‘On the Dterminants of Corporate Usage of Financial Derivatives’, Journal of International Financial Management and Accounting, vol. 9, no. 2, pp. 132-166 ‘Growth of derivatives use in RP is fastest in region’, Business World, Manila, April 9, pp. 9 Guay W. 1999, ‘The impact of derivatives on firm risk: an empirical examination of new derivative users’, Journal of Accounting and Economics, vol. 26, pp. 319-351; ST Journ f Internation July / December 2005 Haddock F. 2000, ‘Selective memory and derivatives in Asia’, Asiamoney, London, vol. 11, no.9, pp. 46-50

Hagelin N., 2003, ‘Why firms hedge with currency derivatives: An examination of transaction and translation exposure’, Applied Financial Economics, Jan 2003, vol. 13, no. 1, pp. 55-

Hempel, G. H., Simonson, D.G., and Coleman, A.B. (1994), Bank Management: Text and Cases, 4" edition, Brisbane: John Wiley & Sons, INC.

Hentschel, L. and Kothari, S.P. 2001, ‘Are Corporations Reducing or Taking Risks with Derivatives ?’, Journal of Financial and Quantitative Analysis, vol. 36, no. 1, pp. 93-118

Hill, R.C., Griffiths, W.E. & Judge, G.G. 2001, Undergraduate Econometrics (2" Edition), John Wiley & Sons, Inc., New York

Howton, S. D. and Perfect, S.B., 1998, ‘Currency and Interest-Rate Derivatives Use in US Firms’, Financial Management, vol. 27, no. 4, winter 1998, pp. 111-121

Howton, S. D. and Perfect, S.B., 1998, ‘Managerial Compensation and Firm Derivative Usage: An Empirical Analysis’, Journal of Derivatives, winter 1998, vol. 6, no. 2, pp. 53-

Jalilvand, A., Switzer, J. and Tang, C. 2000, ‘A Global Perspective on the Use of Derivatives for Corporate Risk Management Decision’, Managerial Finance, vol. 26, no. 3, pp. 29-38

Kasibhatla, K.M., Rivera-Solis, L-E., and Malindretos, J.,2001, ‘MNC Foreign Exchange Exposure Under FASB No. 8 and Fasb No. 52: A Survey’, American Business Review, January2001, pp. 18-25 Kawaller I.G. 2002, ‘Hedge Effectiveness Testing’, AFP Exchange, September/October 2002, pp. 62-Kettell B 1999, ‘Derivatives: valuable tool or wild beast?’, Balance Sheet, vol. 7, no.2, pp. 14-20

Khim, E. M., and Liang, D. L. K., 1997, ‘The use of derivative financial instruments in company financial risk management: The Singapore Experience’, Singapore Management Review, Singapore, July 1997, vol. 19, no. 2, pp. 17-44 Klitgaard T. 1999, ‘Exchange Rates and Profit Margins: The case of Japanese Exporters’, Federal Reserve Bank of New York Economic Policy Review, April 1999 pp. 41-51. ID, Journal of International Studies - July / December 2005 Kogut B. 1998, ‘International business: The new bottom line’, Foreign Policy, Spring. pp. 152-165 Kregel J. A. 2000, ‘Derivative and global capital flows: Applications to Asia’, Financier, Philadelphia, vol. 7, no.1-4, pp. 57-

Leontiades J. C., 2001, Managing the Global Enterprise — Competing in the Information Age (1 Edition), Financial Times Prentice Hall, UK

Lim W., 1998, ‘Asian Derivatives to Change Significantly’, Malaysian Business Times, publication date: 28/10/1998 Loong P. 2002, ‘The friendly face of derivatives’, Asiamoney, London, vol.13, no.3, pp. 46-48

Lypny G.J., 1993, ‘An Experimental Study of Managerial Pay and Firm Hedging

Decisions’, The Journal of Risk and Insurance, June 1993, vol. 60, no. 2, pp. 208-229

Mallin, C., Ow-Yong, K. and Reynolds, M., 2001, ‘Derivatives Usage in UK Non-Financial Listed Companies’, The European Journal of Finance, vol. 7, no. 1, pp. 63-91 ‘Managing currency: Finding the right approach’, Global Investor, London, Dec 2002/ Jan 2003, vol. 158, pp. 46-48

Maurer, B., 2002, ‘Repressed Futures: Financial Derivatives’ Theological Unconscious’, Journal of Economy and Society, vol. 31, no. 1, pp. 15-36

Maurice, A., 1999, ‘New policies protect against earnings risk?’, National Underwriter,

Chicago, February 1999, vol. 103, no.6, pp. 9-18

Mian, S. L., 1996, ‘Evidence on corporate hedging policy’, Journal of Financial & Quantitative Analysis, Seattle, September 1996, vol. 31, no. 3, pp. 419-439

Miller K.D. & Reuer J. 1998, ‘Firm Strategy and economic exposure to foreign exchange rate movements’, Journal of International Business Studies, London, vol. 29, no.3, pp. 493-513

Miyamoto, A. and Bird, J., 2002, ‘Hedging with derivatives after Enron’, Corporate

Finance, London, June 2002, vol. 211, pp. 37-38

Moles, P. & Bradley, K., 2002, ‘The Nature and Determinants of the Economic Currency Exposure of Non-financial UK Firms’, Managerial Finance, vol. 28, no. 11, pp. 1-15 Journal of International Studies - July / December 2005

Nance, D. R., Smith, C. W. Jr., and Smithson, C. W. 1993, ‘On the determinants of corporate hedging’, The Journal of Finance, Cambridge, March 1993, vol. 48, no. 1, pp. 267-285

Nguyen, H., and Faff, R. 2002, ‘On the Determinants of Derivative Usage by Australian

Companies’, Australian Journal of Management, Sydney, June 2002, vol. 27, no. 1, pp. 1-24 O Brien, T. J., 1997, ‘Accounting versus economic exposure to currency risk’, Journal of Financial Statement Analysis, New York, Summer 1997, vol. 2, no. 4, pp. 21-

Pantzalis, C., Simkins, B.J. and Laux, P.A., 2001 ‘Operational hedges and the foreign exchange exposure of US multinational corporations’, Journal of International Business Studies, Washington, Fourt Quarter 2001, vol. 32, no. 4, pp. 793-812

Petersen, M. A., and Thiagarajan, S. R., 2000, ‘Risk measurement and hedging: With and without derivatives’, Financial Management, Tampa, Winter 2000, vol. 29, no. 4, pp. 5-29

Piga, G., 2001, ‘Do Governments Use Financial Derivatives Appropriately? Evidence from Sovereign Borrowers in Developed Economies’, International Finance, vol. 4, no. 2, pp. 189-219

Prevost, A.K., Rose, L.C., and Miller, G., 2000, ‘Derivatives usage and financial risk management in large and small economies: A comparative analysis’, Journal of

Business Finance & Accounting, Oxford, June/July 2000, vol. 27, no. 5/6, pp. 733-159

Reuer J. & Leiblein M. 2000, ‘Downside Risk Implications of Multinationality and International Joint Ventures’, Academy of Management Journal, vol. 43, no.2, pp. 203-214

Ruhanie, N., 2001, ‘MDex Plans to Widen Product Base for Investors’, Malaysian Business Times, publication date: 12/6/2001 Salfi P. 1998, ‘How not to account for derivatives’, Accountancy, vol. 122, Issue 1261, pp. 71-Scholes M.S. 1998, ‘Derivative in a dynamic environment’, The American Economic Review, Nashville, vol. 88, no.3, pp. 350-370

Sheedy, E., and McCraken, S. (1997), Derivatives: The risks that remain, Sydney: Allen & Unwin

Smith, C. W. and Stulz, R. M. 1985, ‘The Determinants of Firms’ Hedging Policies’, Journal of Financial & Quantitative Analysis, Seattle, December 1985, vol. 20, no. 4, pp. 391-406

Streeter, B. 2002, ‘Why Greenspan likes derivatives’, American Bankers Association — ABA Banking Journal, New York, December 2002, vol. 94, no. 12 pp. 36-39

Thurston, C.W. 2001, ‘OTC Derivatives Use Rises While Sovereigns Slow’, Global Finance, vol.15, no. 3, pp. 40-42

Tufano, P., 1996, ‘Who manages risk? An empirical examination of risk management practices in the gold mining industry’, The Journal of Finance, vol. 51, no. 4, pp. 1097-11137

Wallace, J. 1998, ‘Best Practices in Foreign Exchange Risk Management’, TMA Journal, Atlanta, vol. 18, no.6, pp. 48-

Wilson, A.C and Rasch, R.H. 1998, ‘New accounting for derivatives and hedging activities’, The CPA Journal, vol. 68, no. 10, pp. 22-28

Yang, J., Davis, G.C., and Leatham, D.J., 2001, ‘Impact of Interest Rate Swaps on Corporate Capital Structure: An Empirical Investigation’, Applied Financial Economics, vol. 11, no. 1, pp. 75-81

Yu, E.S.H., 2002, ‘Risk Management of Shanghai Enterprises with Financial Derivatives’, The Journal of Applied Business Research, vol. 18, no. 1, pp. 117-Historical Exchange Rates by Pacific Commerce, 2002 ({Online, accessed Jan 2003]. URL : http://pacific.commerce.ube.ca/xr/plot.html Historical Exchange Rates by University of British Columbia, 2003 (Online, accessed Nov 2003]. URL: http://fx.sauder.ubce.ca/plot.html Historical US-Treasury Interest Rate by Federal Reserve Bank of St. Louis, 2003 {Online, accessed Dec 2003]. URL: http://research.stlouisfed.org/fred2/series/DGS 10/22 Unpublished : My own submission of AMS | for UNISA’s DBA program, Dec, 2002 Unpublished : My own submission of DRS 3 for UNISA’s DBA program, May, 2003 75.7 al Studies - July / December 2005 Unpublished : My own submission of AMS 3 for UNISA’s DBA program, July, 2003 Unpublished : My own submission of Research Proposal Paper 1, 2 and 3 for UNISA’s DBA program, September, 2003 Journal of International Studies - July / December 2005

Downloads

Published

12-12-2005

How to Cite

Mohamad, M. H., & Mohd Amin, M. F. (2005). Derivatives Usage in Non-Financial Firms. Journal of International Studies, 1, 53-76. https://doi.org/10.32890/jis2005.1.4

Most read articles by the same author(s)