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Managing foreign exchange risk with derivatives in UK non-financial firms

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  • Zhou, Victoria Yun
  • Wang, Peijie

Abstract

This study assesses the effect of derivatives use of large UK non-financial firms in their foreign exchange risk management activity and tests value relevance of FRS 13. Using a sample of FT UK 500 non-financial firms for 1999 when FRS 13 was implemented, we examine the foreign exchange risk exposure of the firm that is engaged in international business activities, and the effect of the use of foreign exchange derivatives on the firm's foreign exchange risk exposure. There is evidence that UK non-financial firms use derivatives to hedge against the risk of unfavorable exchange rate movements and the hedge is effective in reducing firms' risk exposure to varied degrees. The results support value relevance of FRS 13 that numerical disclosure of derivatives use by firms reveals important information to investors and helps firms reduce the cost of capital and increase firm value.

Suggested Citation

  • Zhou, Victoria Yun & Wang, Peijie, 2013. "Managing foreign exchange risk with derivatives in UK non-financial firms," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 294-302.
    • Handle: RePEc:eee:finana:v:29:y:2013:i:c:p:294-302
    DOI: 10.1016/j.irfa.2012.07.005
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    Cited by:

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    2. Lado-Sestayo, Rubén & De Llano-Paz, Fernando & Vivel-Búa, Milagros & Martínez-Salgueiro, Andrea, 2023. "Commodity exposure in the eurozone: How EU energy security is conditioned by the Euro," Energy, Elsevier, vol. 277(C).
    3. Abhimanyu Sahoo & Seshadev Sahoo, 2020. "What Drives Derivatives: An Indian Perspective," JRFM, MDPI, vol. 13(6), pages 1-19, June.
    4. Lau, Chee Kwong, 2016. "How corporate derivatives use impact firm performance?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 102-114.
    5. Quang Nguyen & Trang Kim & Marina Papanastassiou, 2018. "Policy uncertainty, derivatives use, and firm-level FDI," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 96-126, January.
    6. Shao, Lili & Shao, Jun & Sun, Zheng & Xu, Huaxin, 2019. "Hedging, speculation, and risk management effect of commodity futures: Evidence from firm voluntary disclosures," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    7. Augustine C. Arize & John Malindretos & Ikechukwu Ndu & Demetri Tsanacas & Neirouz Watad, 2022. "A Survey of Multinational Company Accounting Foreign Exchange Exposure," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 12(2), pages 128-135.
    8. Hong V. Nguyen, 2018. "Hedging and hedging effectiveness under required disclosures: a study of the impact of derivatives use on capital investment," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 471-491, July.
    9. Thapa, Chandra & Neupane, Suman & Marshall, Andrew, 2016. "Market liquidity risks of foreign exchange derivatives and cross-country equity portfolio allocations," Journal of Multinational Financial Management, Elsevier, vol. 34(C), pages 46-64.
    10. Praveen Bhagawan M. & P.J. Jijo Lukose, 2014. "Currency Exposure and Hedging Practices among Indian Non-financial Firms," Foreign Trade Review, , vol. 49(3), pages 247-262, August.

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    More about this item

    Keywords

    FRS 13; Foreign exchange derivatives; Foreign exchange exposure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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