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The Determinants of Foreign Currency Hedging by UK Non-Financial Firms

The Determinants of Foreign Currency Hedging by UK Non-Financial Firms. Case Analysis MBA 555 Managerial Economics. By: Brian Dungey, Faith Kaplan, Ryan Litwin, John Messere. Topic. What is corporate hedging?

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The Determinants of Foreign Currency Hedging by UK Non-Financial Firms

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  1. The Determinants of Foreign Currency Hedging by UK Non-Financial Firms Case Analysis MBA 555 Managerial Economics By: Brian Dungey, Faith Kaplan, Ryan Litwin, John Messere

  2. Topic • What is corporate hedging? • Corporate hedging employs the use of one or more of the mentioned financial instruments to minimize the potential negative impacts of a firm’s exposure • Foreign currency hedging • Derivative methods • Interest rate hedging

  3. Legitimate Reasoning for Corporate Hedging • M&M (1958) • Smith and Stulz (1985) • Explains how hedging can affect firm value

  4. Reasoning for Corporate Hedging • Corporate Taxes • Costs of Financial Distress • Underinvestment Costs • Foreign Currency Exposure • Other Motives • Size

  5. Objectives • Determine which factors are important in foreign currency hedging decisions

  6. Research History • Early Studies – investigate a broad range of exposures when trying to find hedging determinants • Recent Studies – have focused on a particular exposure E.g. foreign currency exposure • Most Recently – scholars have focused on how foreign currency debt is used to hedge against foreign currency exposure

  7. Methodology • Sample size 366 firms all having some degree of foreign currency exposure • Multivariate tests – includes foreign currency hedgers and other hedgers • Exclusion of other hedgers • Multivariate test – for currency only hedgers • Robustness tests

  8. Econometric Model • Multivariate Regression Analysis • Logistic Regression • Likelihood that a firm hedges foreign currency exposure and proxies for incentives to hedge. • Coefficients & Elasticity • Significance and Importance

  9. Data & Results • Test 1 • Include interest rate/commodity price hedging firms • Test 2 • Does not include interest rate/commodity hedging firms • Test 3 • Firms that only participate in foreign currency hedging (44% of hedgers)

  10. Data & Results (cont.)

  11. Policy • Foreign Currency Hedgers • Currency Swap versus Foreign Currency Debt • Affects on potential profits from exchange rate changes • Liquidity, currency exposure, and size. • Relationship between higher financial distress costs and foreign currency hedging. • UK firms versus US firms. • US Tax benefits to debt.

  12. THANK YOU!

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