Vol 1 No 1 (2017)
Articles

Factors that Affect the Derivatives Usage of Non-Financial Listed Firms of Pakistan to Hedge Foreign Exchange Exposure

Numan Khan
National College of Business Administration and Economics (NCBA&E)
Khurshid Ali
Salford University Manchester, UK
Alina Kiran
Lecturer at Bahria University Islamabad
Riaqa Mubeen
Graduate from University of Agriculture, Faisalabad
Zeeshan Khan
Pakistan Institute of Development Economics (PIDE)
Nasir Ali
COMSATS Institute of Information Technology, Islamabad
Published November 25, 2016
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529 Views | 1478 Downloads
Keywords
  • Foreign exchange exposure,
  • Hedging,
  • Pakistan stock exchange.

Abstract

This study aims to investigate the factors that affect the derivatives usage of non-financial listed firms of Pakistan to hedge foreign exchange exposure by using data of 51 non-financial firms listed on Pakistan stock exchange from 2010-2013. The dependent variable was derivative usage which was used as dummy since no financial information was disclosed in company annual reports but the decision of usage or not. Non-parametric tests were uses which is univariate analysis to calculate the mean difference between users and non-users of derivative usage for hedging purposes. Further, logistic regression model was used to analyze the impact of financial distress costs, tax convexity, underinvestment problem, profitability, managerial holdings of the company and  foreign sales on firm’s decision to whether they use FX derivatives for hedging purposes or not. The result shows that financially distressed firms, having lower managerial holdings and lower interest coverage ration with high foreign sales are using FX derivatives in Pakistan.

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