Currency Exposure and The Determinants of Corporate Hedging Practice Among Malaysian Non-Financial Firms

Abstract

This study involves a two-stage analysis. Firstly, the study examines currency exposure and corporate hedging practice (proxied by foreign currency derivative (FCD)) among Malaysian non-financial firms from 1995-2016. It is found that 35.75% of the sample firms are significantly affected by the exposure. The use of FCD is also found to be significantly effective in managing the level of currency exposure. Secondly, the study further investigates the determinants of the use of FCD by incorporating both firm-specific and macroeconomic factors. The study finds almost all the firm-specific factors (liquidity, price-earning ratio, asset growth, and foreign sales) and macroeconomic factors (current account, trade, and inflation) as significant determinants behind the firms’ decision to use FCD. Interestingly, the use of FCD is also driven by specific financial events. Due to the nature of the crisis period, the effect of FCD use is only significant during the Asian financial crisis rather than the peg period and global financial crisis. The novelty of this study lies in the inclusion of the macroeconomic determinants of the FCD use. Hence, the detailed analyses may guide the decision-making process of FCD use as the analysis tackles the exposure and FCD use issues in several aspects with the inclusion of the economic information content.