Using financial derivatives to hedge against currency risk : British large and medium-sized firms

Abstract

Nowadays, as a growing number of firms strive to conduct their business at international market place, currency risk has increasingly raised concern among financial mangers due to its substantial impact on companies’ financial results. Financial derivative instruments (Forward, Futures, Options, Swaps) are utilized as efficient hedging mechanisms against such an exchange rate exposure. The main objective of this study is to examine whether derivatives play a primary role in mitigating an adverse movement in currency in multinational firm. The research is carried out in British large and medium- sized companies. The empirical research was conducted on the basis of qualitative method. The findings reveal that the downward effect of currency risk is identified and evaluated in a majority of multinational companies. Although other hedging techniques such as netting, borrowings or natural hedge are at times employed, financial derivative instruments are crucial to hedge against currency risk in multinational companies. In general, forwards is designated as the most favorable type of derivates to minimize exchange rate fluctuation, followed by swaps. Furthermore, hedging strategy is implemented in accordance with individual firm’s policy.