The determinants of foreign exchange hedging and their effects on foreign exchange exposure and stock return volatility of Philippine publicly-listed companies

• Main Authors: Dichaves, Rochelle C., Guinto, Jahm Mae E., Lim, Catherine Joy T., Serrano, Jannel Ann O.
• Format: text
• Language: English
• Published: Animo Repository 2014
• Subjects: Hedging (Finance) > Accounting; Currency question; Foreign exchange; Deflation (Finance); Accounting
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/11480
• Institution: De La Salle University

The establishment of the ASEAN Free Trade Area in 2015 will set into motion a lot of changes that is yet to be seen in today's society. Such shifts in economic policy can open many opportunities to businesses, which, if properly utilized, could turn any company into a highly profitable one. Conversely, this can also cause them to be more vulnerable to risks they were previously less exposed to, such as foreign exchange exposure, affecting their income generation. There is a pressing need for businesses to obtain more relevant information on the specific factors that are affecting the way that they conduct business today so that they can become successful. This paper presents the effects of the determinants of foreign exchange hedging to stock return volatility to promote awareness and motivate action on such effects to Philippine publicly-listed companies and other stakeholders. A three-step Simultaneous Equation Model (SEM) panel regression is used to assess the overall significance of these determinants from 48 firms during the years 2003 to 2012. Only firm size greatly affects the extent of hedging activities performed by the companies in managing their foreign exchange exposure. Hedging activities were also observed to have a direct significant effect on such firm-level exchange risk. The same relationship also exists between foreign exchange exposure and corporate stock return volatility. The findings of this research also provide that the sectors with the greatest exposure are the financial and holding sectors while the property and mining & oil sectors are the least exposed.