Exchange Rate Exposure, Foreign Currency Debt, and the Use of Derivatives: Evidence from Brazil

Júnior, José Luiz Rossi

doi:10.2753/ree1540-496x470104

Cited by 19 publications

(13 citation statements)

References 35 publications

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“…The variable foreign involvement (FSTS) shows remain positive throughout the all models as we expected that the foreign involvement is the main contributing factor of foreign exchange rate exposure. However all the cases it indicate only insignificant relation with foreign exchange rate exposure and it is consistent with some earlier studies (Clark & Mefteh, 2011b;Junior, 2011;Monshi et al, 2011;Hoa Nguyen & Faff, 2003). However some studies were reported negative relation between foreign involvement and foreign exchange exposure (AlShboul & Alison, 2009;Hoa Nguyen et al, 2007;Hoa Nguyen & Faff, 2006) The hedging incentive variable size is showing positive sign.…”

Section: Second Stage Cross Sectional Regression Resultssupporting

confidence: 81%

“…However some studies were reported negative relation between foreign involvement and foreign exchange exposure (AlShboul & Alison, 2009;Hoa Nguyen et al, 2007;Hoa Nguyen & Faff, 2006) The hedging incentive variable size is showing positive sign. The earlier researchers (Al-Shboul& Alison, 2009;Junior, 2011;Monshi et al, 2011;Hoa Nguyen et al, 2007) were justified this because size of firm is one of main determinant of hedging decision. Usually big firms are more foreign involvement and more foreign exchange rate exposure.…”

Section: Second Stage Cross Sectional Regression Resultsmentioning

confidence: 99%

“…A two factor model by Jorion(1990) in which he regressed the stock return of corporate firms by two independent variables, via foreign exchange rate variable and market return variable for controlling other factors which affect the stock return of a company. Jorion(1990) model has been extensively used by number of researchers in different and most of the studies reported a weak relationship between firms value or stock return and foreign exchange rate (Allayannis & Ofek, 2001;Al-Shboul & Alison, 2009;Choi & Prasad, 1995;Jorion, 1990;Junior, 2011;Kanagaraj & Sikarwar, 2011;Kiymaz, 2003;Hoa Nguyen & Faff, 2003). Researchers argued that the reason for weak foreign exchange exposure of firms is that the corporate firms were themselves managing such risk by using financial instruments like foreign currency derivatives (Allayannis & Ofek, 2001;Al-Shboul & Alison, 2009;Anderson, Makar, & Huffman, 2004;Chiang & Lin, 2005;Makar & Huffman, 2001;Hoa Nguyen & Faff, 2003) and the foreign currency denominated debt ( T Aabo, Hansen, & Muradoglu, 2011;Tom Aabo, 2006;Bae & Kwon, 2011;Elliott, Huffman, & Makar, 2003;Junior, 2011;Karlsson & Palm, 2012;S Kedia & Mozumdar, 2003) Many studies in different countries are giving different evidences of this conjecture.…”

Section: Review Of Literaturementioning

confidence: 99%

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Foreign Currency Denominated Debt as A Hedging tool for Foreign Exchange Rate Risk Exposure

Samsudheen¹

2018

ijms

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Section: Second Stage Cross Sectional Regression Resultssupporting

confidence: 81%

Section: Second Stage Cross Sectional Regression Resultsmentioning

confidence: 99%

Section: Review Of Literaturementioning

confidence: 99%

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Foreign Currency Denominated Debt as A Hedging tool for Foreign Exchange Rate Risk Exposure

Samsudheen¹

2018

ijms

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“…When operating in developing economies, firms are compelled to use a local currency prone to depreciation, thus jeopardizing their financial health. Indeed, contrary to what is observed in developed economies (Guay & Kothari, 2003), when depreciation occurs, firms from developing countries face negative effects (Galindo, Panizza, & Schiantarelli, 2003;Rossi Júnior, 2011).…”

Section: Exchange Rate Exposurementioning

confidence: 65%

Why do Latin American firms hold so much more cash than they used to?

Artica

Brufman²,

Saguí

2019

Rev. contab. finanç.

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This study assesses whether the trade-off or the pecking order theories explain the increased cash ratios in Latin American firms. It also assesses the explanatory power of additional variables that identify key macroeconomic features in Latin American economies. Due to its noticeable increase, cash became a key feature of Latin American firm performance over the last decades. The need for a better understanding is stressed by the fact that, during most of the last decade, these firms experienced a phase of accelerated economic growth and buoyant financial markets. The resulting surge in real investment opportunities within this period makes the growing cash holdings all the more puzzling. As far as we know, no other research addresses this issue in a direct way. There are robust facts about the increased cash holdings in Latin American firms. This article assesses traditional explanations and defines which fits more properly to the study sample. A complementary explanation regarding exchange rate exposure and key macroeconomic variables is constructed and empirically evaluated. To address potential sources of endogeneity, dynamic panel data methods are used. Particularly, the system generalized method of moments (GMM) was applied, as proposed by Blundell and Bond (1998). This article reports an increasing trend for corporate cash holdings in a sample of selected Latin American firms between 2000 and 2014. Likewise, net leverage and short-term debt show a declining trend over the same period. The trade-off theory may explain this. A substantial effect of macroeconomic variables particularly affecting firms that operate in the region is observed, such as exchange rate risks.

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“…Lin (2011) investigates the exchange rate exposure of six emerging markets including India and reports that higher exposure during the crisis period of 2008 can be attributed to firm level factors like exports and foreign assets. Rossi (2011) also finds that firm's hedging and financial policies led to a higher exposure during crisis periods for Brazilian firms. Bacha et al (2013) find that the Malaysian firms face higher exposure during the Asian crisis period which reduced remarkably in the post-crisis period.…”

Section: Theoretical Background and Empirical Evidencementioning

confidence: 84%

Exchange rate fluctuations and firm value: impact of global financial crisis

Sikarwar

2018

JES

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Purpose The purpose of this paper is to examine the presence of exchange rate exposure and its relationship with currency derivatives usage in the dynamic environment of the global financial crisis of 2008. Design/methodology/approach Using a sample of 624 Indian firms over the period of April 2001–March 2016, this paper investigates the linear and asymmetric exposure by dividing the full sample period into different sub-periods around the crisis. Findings The evidence presented in the paper suggests that the firms are more exposed to the exchange rate changes since the onset of the financial crisis. However, there is a lack of evidence that the usage of currency derivatives is more effective in reducing exposure during the crisis/post-crisis period as opposed to the pre-crisis period. Practical implications The findings are important to investors and managers for a better understanding of firm behaviours in relation to their risk management policies during the period of external shocks like crisis. Originality/value There is a paucity of research to explore whether the effect of currency derivatives usage on exchange rate exposure varies during external shocks such as crisis periods. The paper provides novel evidence that the effectiveness of derivatives usage in alleviating exposure becomes less during the dynamic environment of crisis.

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Exchange Rate Exposure, Foreign Currency Debt, and the Use of Derivatives: Evidence from Brazil

Cited by 19 publications

References 35 publications

Foreign Currency Denominated Debt as A Hedging tool for Foreign Exchange Rate Risk Exposure

Foreign Currency Denominated Debt as A Hedging tool for Foreign Exchange Rate Risk Exposure

Why do Latin American firms hold so much more cash than they used to?

Exchange rate fluctuations and firm value: impact of global financial crisis

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