Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: A Study on Advanced Chemical Industries (ACI) in Bangladesh
International Journal of Economics, Finance and Management Sciences
Volume 4, Issue 2, April 2016, Pages: 57-66
Received: Feb. 11, 2016; Accepted: Feb. 24, 2016; Published: Mar. 7, 2016
Views 5222      Downloads 154
Author
Nusrat Jahan, Department of Business Adminstration, Uttara University, Uttara, Dhaka
Article Tools
Follow on us
Abstract
Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. Although in Bangladesh, the use of currency derivatives to hedge foreign exchange risk is not popular among the existing firms engaged in foreign exchange transactions, there are a few firms such as ACI & General Motors etc with extensive foreign exchange-rate exposure and economies of scale in hedging activities are more likely to use currency derivatives. This is because, given the potential shifts in the supply of or demand for currency, firms and individuals who have assets denominated in foreign currencies can be affected favorably or unfavorably. These firms may want to alter their currency exposure in order to grab benefit or hedge risk from the expected movements of exchange rates. This study provides a detailed analysis along with a background on currency derivatives which are commonly used by some of large firms existing in Bangladesh in order to capitalize on or hedge against expected exchange rate exposures measured by these firms. In this paper, we have also divulged an analytical framework for measuring exchange rate exposures accelerating the use of currency derivatives in foreign exchange market of Bangladesh.
Keywords
Currency Derivatives, ACI Ltd., Exposures, Hedging, Speculation
To cite this article
Nusrat Jahan, Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: A Study on Advanced Chemical Industries (ACI) in Bangladesh, International Journal of Economics, Finance and Management Sciences. Vol. 4, No. 2, 2016, pp. 57-66. doi: 10.11648/j.ijefm.20160402.14
Copyright
Copyright © 2016 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
References
[1]
Allayannis, G., 1996, \ Exchange rate exposure revisited, Working Paper, Darden Graduate School of Business, University of Virginia.
[2]
Bodnar, G., Hayt, G., Marston, R., and Smithson, W., 1995, \Wharton survey of derivatives usage by U. S. non-financial firms. Financial Management, 24, Summer.
[3]
Block, S. and Gallagher, T., 1986, \The use of interest rate futures and options by corporate financial managers" Financial Management, Autumn.
[4]
Booth, J., Smith, R., and Stolz, R., 1984, \The use of interest rate futures by financial institutions Journal of Bank Research, Spring.
[5]
Corporate Annual Reports and reports of treasury department at ACI (Advanced Chemical Industries Ltd.) from 2005 to 2010.
[6]
Froot, K., Scharfstein, D., and Stein, J., 1993, \Risk management: Coordinating corporate investment and financing policieses, Journal of Finance.
[7]
Hamada, R. S., 1972, "The Effect of Firm's Capital Structure on the Systematic Risk of Common Stock," Journal of Finance (June), 435-452.
[8]
Hodder, J. E., 1982, "Exposure to Exchange - Rate Movements," Journal of international Economics (November), 375-386.
[9]
Haushalter, D., 1997 \ The role of corporate hedging: Evidence from oil and gas producers Working Paper, Purdue University, West Lafayette, IN.
[10]
Hodder, J., 1982, \ Exposure to exchange rate movements, Journal of International Economics, 13, November.
[11]
Jorion, P., 1990, "The Exchange Rate Exposure of U. S. Multinationals," Journal of Business (July), 331-345.
[12]
Shapiro, A., 1975, \Exchange rate change, inflaation and the value of the multinational corporation, Journal of Finance, 60.
[13]
Simkins, B., and Laux, P., 1997, \Derivatives use and the exchange rate risk of investing in large U. S. corporations, Working Paper, Case Western Reserve University.
[14]
Stulz, R., 1984, \Optimal hedging policies, Journal of Financial and Quantitative Analysis 19, June.
ADDRESS
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
U.S.A.
Tel: (001)347-983-5186