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Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: A Study on Advanced Chemical Industries (ACI) in Bangladesh

Received: 11 February 2016     Accepted: 24 February 2016     Published: 7 March 2016
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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.

Published in International Journal of Economics, Finance and Management Sciences (Volume 4, Issue 2)
DOI 10.11648/j.ijefm.20160402.14
Page(s) 57-66
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2016. Published by Science Publishing Group

Keywords

Currency Derivatives, ACI Ltd., Exposures, Hedging, Speculation

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.
Cite This Article
  • APA Style

    Nusrat Jahan. (2016). 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, 4(2), 57-66. https://doi.org/10.11648/j.ijefm.20160402.14

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    ACS Style

    Nusrat Jahan. Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: A Study on Advanced Chemical Industries (ACI) in Bangladesh. Int. J. Econ. Finance Manag. Sci. 2016, 4(2), 57-66. doi: 10.11648/j.ijefm.20160402.14

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    AMA Style

    Nusrat Jahan. Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: A Study on Advanced Chemical Industries (ACI) in Bangladesh. Int J Econ Finance Manag Sci. 2016;4(2):57-66. doi: 10.11648/j.ijefm.20160402.14

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  • @article{10.11648/j.ijefm.20160402.14,
      author = {Nusrat Jahan},
      title = {Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: A Study on Advanced Chemical Industries (ACI) in Bangladesh},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {4},
      number = {2},
      pages = {57-66},
      doi = {10.11648/j.ijefm.20160402.14},
      url = {https://doi.org/10.11648/j.ijefm.20160402.14},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20160402.14},
      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.},
     year = {2016}
    }
    

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Author Information
  • Department of Business Adminstration, Uttara University, Uttara, Dhaka

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