The Journal of Risk Finance

Emerald Article: Corporate derivatives and foreign exchange risk management: A case study of non-financial firms of Pakistan Talat Afza, Atia Alam

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To cite this document: Talat Afza, Atia Alam, (2011),"Corporate derivatives and foreign exchange risk management: A case study of non-financial firms of Pakistan", The Journal of Risk Finance, Vol. 12 Iss: 5 pp. 409 - 420 Permanent link to this document: http://dx.doi.org/10.1108/15265941111176145 Downloaded on: 12-09-2012 References: This document contains references to 30 other documents To copy this document: permissions@emeraldinsight.com

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Corporate derivatives and foreign exchange risk management

A case study of non-nancial rms of Pakistan
Talat Afza
Faculty of Business Administration, COMSATS Institute of Information Technology, Lahore, Pakistan, and

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Atia Alam
Department of Management Sciences, COMSATS Institute of Information Technology, Lahore, Pakistan
Abstract
Purpose The purpose of this paper is to identify the factors affecting rms decision to use foreign exchange (FX) derivative instruments by using the data of 86 non-nancial rms listed on Karachi Stock Exchange for the period 2004-2007. Design/methodology/approach Required data were collected from annual reports of listed rms of Karachi Stock Exchange. Non-parametric test was used to examine the mean difference between users and non-users operating characteristics. Logit model was applied to analyze the impact of rms nancial distress costs, underinvestment problem, tax convexity, protability, managerial ownership and foreign exchange exposure on rms decision to use FX derivative instruments for hedging. Findings Results explain that rms having higher foreign sales are more likely to use FX derivative instruments to reduce exchange rate exposure. Moreover, nancially distressed large-size rms with nancial constraints and fewer managerial holdings are more likely to use FX derivatives. Research limitations/implications Incomplete nancial instrument disclosure requirements restricted researchers to using binary variable as a dependent variable instead of notional value or fair value of derivative usage. Practical implications The study shows that in the presence of amateur derivative market, Pakistani corporations possessing higher agency costs of debt, agency costs of equity, and nancial constraints will benet more by dening hedging policies coherent with the rms investment and nancing policies in order to enhance rm value. Originality/value Until now, no earlier empirical study focused on the determinants of a rms hedging policies in Pakistan, in the presence of volatile exchange rates,. The current study, therefore, attempts to identify the factors which affect the rms decision to use derivative instruments for hedging FX exposure of non-nancial rms in Pakistan. Keywords Pakistan, Foreign exchange, Risk management, Foreign exchange derivatives, Hedging, Foreign exchange exposure, Non-nancial rms Paper type Research paper

1. Introduction Growing globalization has encouraged many corporations to extend their businesses beyond the geographical boundaries in order to benet from competitive advantage and economies of scale. Penetration into new markets has increased the rms protability, on one hand, and on the other it has also increased the variability in net income

The Journal of Risk Finance Vol. 12 No. 5, 2011 pp. 409-420 q Emerald Group Publishing Limited 1526-5943 DOI 10.1108/15265941111176145

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because of various nancial risks. Therefore, the managers of the multinational rms are focusing on the importance of risk management techniques to reduce variability of their cash ows from foreign operations due to the uctuations in foreign exchange (FX) rates. It is generally believed that the higher exchange rate movements and the unpredictability of foreign sales affect the rms level of protability. Therefore, managers dealing in international operations are of the view that different trade agreements and removal of restrictions on capital ows have increased rms exchange rate exposure. Additionally, majority of the countries are following oating exchange rate or variations of oating exchange rate system, due to which estimated cash ows from their international operations are exposed to higher exchange rate risk and thus highlights the importance of employing different risk management techniques for hedging rms uncovered positions. Asian crises in 1998 had increased the FX exposure of the countries having large number of multinational rms, in general, and Asian countries in particular. Depreciating currency and unstable economic and political environment in Asian countries have increased the countries risk level, although lower cost of the factors of production and untapped markets have provided many new opportunities for multinational companies. During the past ve years, Pakistani stock markets have shown higher stock price volatility and can be characterized as among the top unstable markets. Like many other emerging economies, in order to hedge the rms future cash ows, Pakistan has developed an exchange traded derivative market for future contracts in 2006 but due to lower trading and liquidity, corporations are reluctant to invest in derivative instruments. (SECP, 2006). A signicant increase in export and import volume of 36 and 61 percent, respectively, has been reported by the State Bank of Pakistan, during the last ve years (SBP, 2009). This increase in foreign trade volume has shown an increasing exposure faced by corporations due to exchange rate uctuations. Corporations also realize that it is difcult to manage exchange rate risk at the early stages of economic development. Thus, a growing need for employment of different risk management techniques exists in Pakistani rms to reduce the FX exposure. Till now, no exchange traded derivative market exists in Pakistan, therefore, corporations are using over the counter market derivative instruments to hedge their risk exposure. In this context, derivatives, dened as off-balance sheet nancial instruments whose values are hypothetically derived from other nancial assets, are widely used by the rms to hedge their FX risk. Existing empirical evidence has focused on examining the factors, both internal and external, which affect the rms decision to hedge FX exposure (Mian, 1996; Jalivand, 1999; Haushalter, 2000; Guay and Kothari, 2003; Foo and Yu, 2005; Schiozer and Saito, 2009). However, this issue is not well explored yet in developing and third world countries, especially, in Pakistan. Therefore, the current study focuses on the Pakistani market to extend the existing literature by identifying the factors affecting FX derivative usage of rms to reduce exchange rate exposure by using sample data of 86 listed non-nancial rms, for the period of 2004-2007. The remaining paper is organized as follows: next section discusses empirical literature, whereas the data and methodology are presented in the third section. Empirical ndings are discussed in fourth section while the last section concludes the discussion.

2. Literature review It is generally believed that shareholders are able to reduce risk by constructing a well diversied portfolio. However, existing literature on risk management shows that corporations are using derivative instruments to minimize rms risk exposure. According to Modigliani and Miller (1958) under perfect capital market conditions, it is useless for a rm to reduce risk by using derivatives. Whereas, theoretical evidence provided by Stulz (1984) and Smith and Stulz (1985) had shown that, under certain market frictions, corporations having specic operating characteristics like, higher nancial distress costs, tax convexity, growth opportunities, managerial holdings and liquidity constraints, have an opportunity to enhance rm value by optimally utilizing hedging techniques. By considering investment and nancing decisions in accordance with rms hedging policies, Froot et al. (1993) had proved mathematically that derivatives will be benecial for rms in two different situations: rst, when external nancing cost exceeds opportunity cost of internal nancing and second, when correlation between investment expenditures and rms cash ows were negative. These results were further tested by Gay and Nam (2002) on 486 non-nancial rms of USA over the period of 1993-1995 and empirical ndings were consistent with Froot et al. (1993). A different justication for corporate risk management had been provided by Bessembinder (1991) that hedging provides an incentive for the rm to decrease nancial distress costs by reducing the opportunistic behavior of equity holders. Purnanandam (2008) had empirically tested the relationship between nancial distressed rms and corporate risk management activities on 2000 non-nancial US rms and found that rms decision to use derivatives was positively inuenced by leverage whereas highly leveraged rms had lower tendency towards derivative usage. In order to test the relationship between rms endogenous policies, Lin et al. (2008) had simultaneously examined the relationship between rms endogenous polices-leverage, growth opportunities and hedging policies, along with other control variables, with a sample data of 495 S&P rms. They observed that highly leveraged rms were more likely to use derivatives and highly growth oriented rms, with low debt ratio, were also more inclined towards the derivative usage. Graham and Rogers (2002) by taking sample data of 442 US non-nancial rms had calculated two tax-based incentives for hedging by using derivative instruments and found that debt tax benet from hedging is four times more than advantage acquired from tax convexity. In addition, study had analyzed the simultaneous effect of debt and leverage on each other and reported a signicantly positive effect on each other. Similarly, with another sample data, Borokhovich et al. (2004) also documented a positive and signicant effect of debt and derivative usage on each other. Borokhovich et al. (2004) had attempted to test the relationship between board composition and derivative usage on 284 US non-nancial rms. By considering other control variables, they suggested that rms having larger outsiders holdings were more likely to use derivatives. Coefcient of size and nancial constraints were consistent with the theory whereas results depicted no relationship with underinvestment problem. Researchers had also explored the determinants of rms derivative usage. By using different sample size of US non-nancial rms, Mian (1996), Horng and Wei (1999) and Haushalter (2000) had found positive effect of leverage on rms derivative usage for hedging purpose whereas many studies exhibited negative relationship of debt

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(Nance et al., 1993; Fok et al., 1997; Geczy et al., 1997). Nance et al. (1993) and Haushalter (2000) depicted positive coefcient for size, growth opportunities and tax convexity. Whereas, Mian (1996) and Horng and Wei (1999) observed mixed evidence for size and growth variables and tax convexity. Mixed results for hedging substitutes and managerial ownership were reported by the empirically studies of Nance et al. (1993), Fok et al. (1997), Horng and Wei (1999) and Haushalter (2000). Based on the same sample data of Australian non-nancial rms, Nguyen and Faff (2002, 2003) found that derivative usage was an increasing function of leverage and size, while managerial ownership is negatively related to rms decision to use derivatives. Mixed evidence was reported for growth options and hedging substitutes. By analyzing 77 non-nancial Canadian rms, Jalilvand (1999) depicted a positive relationship between nancial distress hypothesis, dividend payout, convertible debt and rms decision to use derivative. Existing empirical evidence is mainly based on developed countries whereas a few empirical investigations had been undertaken in Asian countries to identify the factors effecting the rms hedging polices like Muller and Verschoor (2007) and Faziullah et al. (2008). Former examined the relationship of rms operating characteristics with the FX exposure on 3,436 Asian rms and estimated a positive inuence of size and dividend payout on FX risk while leverage and liquidity showed a negative impact. Whereas, the later one empirically tested 101 Malaysian rms using derivatives and found a positive relationship between debt, tax convexity, size and rms decision to use derivative techniques, whereas market to book value and dividend yield depicted a negative impact on derivative usage. In case of Pakistan, although researchers have tried to determine factors affecting exchange rate of Pakistani rupee, yet no study had explored the factors, both endogenous and exogenous, affecting the rms decision to use FX derivative instruments for hedging rms FX rate risk in Pakistan. Current paper aims to ll this gap by investigating the factors inuencing rms decision to use FX derivatives by using the data of 86 listed non-nancial rms of Pakistan for the period 2004-2007. Moreover, it is also expected that present study may help in providing additional guidelines to decision makers in managing the rms FX risk exposure by simultaneously planning rms investment and nancing policies with rms hedging policies. 3. Data and methodology Following Nguyen and Faff (2002), the study aims to identify the impact of nancial distress costs, underinvestment costs, tax convexity, managerial incentives and other control variables on rms decision to use FX derivative to reduce FX rate risk. It is assumed that rms use derivatives to hedge FX exposure, hence, in order to test whether rms use FX derivatives to hedge risk exposure or not, logit model is used with a value one for users and zero for non-users. In order to test empirically the factors affecting the rms decision to use FX derivatives instruments, a sample data of 86 non-nancial rms are taken for the period of 2004-2007. Data are collected from annual reports of non-nancial rms listed on Karachi Stock Exchange and prices data are gathered from ofcial web site of Karachi Stock Exchange. According to International Accounting Standards 32 and 39, it is mandatory for rms to disclose their usage of hedging instruments and their respective fair value in the notes of annual reports in a uniform manner. Almost 60 percent

of the sample rms declared their usage of foreign currency derivatives. Financial sector has been excluded from the sample data since their business activities require derivatives to be used for trading purpose or speculative motive. For detailed comparison between operating characteristics of rms that consider hedging as a value enhancing activities to those rms whose operating distinctiveness does not consider derivative usage as a feasible activity, sample data has been divided into two sub-groups. One group is classied as users and other as non-users. Non-parametric univariate test is used to test the mean difference between the operating characteristics of users and non-users. In order to identify the determinants of rms hedging policies, logit model is used. Model 1 depicts that derivative usage is a function of nancial distress costs, tax convexity, asset growth cash ow, protability, managerial ownership and foreign sales: DERIVit a b1 FDCit b2 INCit b3 SIZEit b4 AGCFit b5 ROAit b6 MNGRLit b7 TAXit b8 LFSit eit where: DERIV FDC INCOV SIZE AGCF dummy one if rm is a FX derivative user and zero otherwise. ratio of tangible assets over total assets, representing nancial distress costs. ratio of earning before interest and taxes by interest expense, representing interest coverage ratio. log of total assets, representing size. ratio of addition of change in tangible assets plus depreciation to net income plus depreciation, representing rms ability to convert growth options into assets in place. ratio of earning after interest and taxes by total assets, representing protability. 1

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ROA

MNGRL log of managerial holdings, representing managers ownership in rm. TAX LFS binary value 1 for unused tax losses and 0 otherwise, representing tax convexity. log of foreign sales, representing FX exposure.

Whereas, model 2 observed the interaction between rms FX derivative usage and its investment and nancing policies following Mian (1996), Lin et al. (2008) and Bartam et al. (2009): DERIVit a b1 LEVit b2 MTBit b3 DPit b4 QRit eit where: LEV ratio of total debt to total assets, representing leverage. MTB ratio of market value of rm to book value of rm, representing growth options. 2

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ratio of dividend per share to earning per share, representing dividend payout ratio. ratio of subtraction of current assets minus inventory to current liabilities, representing liquidity.

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4. Findings and analysis (i) Univariate analysis: Table I shows descriptive statistics of users and non-users of FX derivatives; standard deviation is in parenthesis. Univarite analysis explains that users have signicantly higher nancial distress costs with mean value of 0.4780 as compared to non-users. Leverage, calculated by taking ratio of total debt over total assets, is lower for the users though mean difference is not statistically signicant. Users, on average have 0.5804 leverage ratio, whereas non-users demonstrate mean value of 0.6244. Inconsistent with the theory of nancial distress costs, derivative users are characterized as low debited rms, though they are able to pay their nance costs but still the additional debt will lead a rm to higher nancial distress costs and it may be costly for a rm to adopt risk management techniques in such situations. Another measure of rms nancial distress cost is its interest coverage ratio, ability of a rm to pay its nance costs, parallel with the theory, users are less competent to pay its interest costs due to nancial constraints and hence employ derivatives as hedging instruments. Aligned with the Pakistans derivative market situation and economies of scale hypothesis, users are identied as large size rms with a value of 6.3332 in comparison with non-users that document an average size of 6.2800. Mann-Whitney U test shows that users and non-users are statistically different from each other in terms of size. Firms growth opportunities are observed by taking ratio of market value of rm to book value of rm. Contradictory to theory, users show on average less growth opportunities, having a mean value of 1.1540, which is lower than average value of non-users; 1.2864. According to pecking order theory, if rms encounter positive NPV projects then they are more likely to nance their tasks through internally

Variables FDC LEV INC SIZE MTB AGCF ROA DP QR MNGRL TAX LFS

Non-user (140) 0.5921 (0.4317) 0.6244 (0.5139) 4.7916 (3.7856) 6.2800 (0.6690) 1.2846 (0.7931) 0.4490 (0.7169) 6.9357 102 02 (0.1213) 0.5487 (2.4462) 4.1415 (3.3618) 0.5256 (0.2991) 0.4500 (0.4992) 1.4888 (2.3763)

Mean User (204) 0.4780 (0.2137) 0.5804 (0.2125) 4.0418 (3.2221) 6.3332 (0.9391) 1.154 (0.5812) 0.9654 (1.3995) 5.1372 102 02 (7.11 10-02) 0.1925 (1.2714) 2.6851 (2.3274) 0.7101 (0.2174) 0.3970 (0.4904) 3.5456 (2.7339)

Mann-Whitney U test 2 3.335 (0.001) * * 2 0.870 (0.384) 2 0.853 (0.394) 2 2.340 (0.019) * * 2 1.979 (0.048) * * 2 3.660 (0.000) * * * 2 0.222 (0.824) 2 0.709 (0.478) 2 5.577 (0.000) * * * 2 1.381 (0.167) 2 0.976 (0.329) 2 0.6727 (0.000) * * *

Table I. Univariate analysis

Note: Signicant at: *10, * *5 and * * *1 percent, respectively

generated funds. Therefore, corporations having growth opportunities are more probable to issue debt and thus tend less towards using FX derivative instruments due to of high transactions costs. Moreover, less growth oriented rms have little FX exposure thus less likely to use foreign currency hedging instruments. Theory predicts that rms ability to nance its growth opportunities provides them an incentive to use hedging instruments. Consistent with theory, by taking ratio of change in net tangible assets plus depreciation to net income plus depreciation, reveals that users are less able to nance its growth opportunities with a mean value of 0.9654 in comparison with non-users which are on average only 0.4490 incapable in nancing their growth opportunities. Mean difference test of asset growth over cash ow shows that users and non-users are signicantly different from each other. Similarly, coherent with the expected coefcients for liquidity and protability, it is found that users have lower level of protability and liquidity. Users are identied on average 5.13 percent protable, whereas non-users are more protable rms with the mean value of 6.93 percent. Nevertheless, mean difference of users and non-users are not statistically signicant. Moreover, users are identied as liquidity constrained rms with the mean value of 2.6851 in comparison with non-users, having an average value of 4.1451. In this case, Mann-Whitney U test shows that users and non-users are signicantly different in terms of liquidity. Contradictory to the theory of substitutes of hedging, rms with lower dividend payout ratio are characterized as user of hedging instruments. Supporting nancial distress hypothesis, users report that non-users have higher dividend payout ratio of 54.87 percent, whereas users have 19.25 percent dividend payout ratio, as lower dividend payout rms perceive themselves riskier because of highly invariable cash ows, hence, they use hedging instruments to reduce nancial distress costs by minimizing cash ow unpredictability. However, mean difference test demonstrate statistically insignicant difference between dividend payout ratio of both the groups. According to agency cost of equity, managers having higher equity stake are more probable to use derivative in best interest of rm as it will ultimately affect rm value. Hence, consistent with the theory, users have higher managerial ownership with the mean value of 0.7101 while non-users document an average value of 0.5256, nevertheless, the mean difference for both groups is not statistically signicant. A dummy variable is used to measure tax convexity. Contradictory to expectations, non-users show higher tax losses with the mean value of 0.45 in contrast with users which have 39.7 percent tax losses. This might be due to the infant status of Pakistani derivative market. Mian (1996) considering sample data of 3,022 rms observed hedgers as having lower tax losses. It is expected that rms need to hedge risk exposure is directly proportional to its FX exposure which is supported by our ndings. Users of hedging instruments are found to be having more foreign currency exposure with the mean value of 3.5456, whereas, non-users report an average value of 1.4888 of foreign sales. Mean difference results show that users are signicantly different from non-users in terms of FX exposure. Generally, users are identied as a nancially distressed large size rms with the lower debt ratio and growth opportunities. In addition, nancially constrained rms having high FX exposure and larger managerial ownership are characterized as the user of derivative instruments for hedging purpose.

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Correlations coefcients are presented in Table II. Firms operating characteristics are divided into two groups. Correlation results of Group A, excluding all investment and nancing variables, explain that protable rms are large in size, have higher interest coverage ratio, more ability to convert its growth options into assets in place and lower managerial ownership; which is consistent with the theory. In addition, rms having higher nancial distress costs have lower interest coverage ratio as it is difcult for them to fulll their obligations. Group B reports correlation coefcients for rms endogenous polices which supports the theory that nancially constrained rms are more likely to take debt for their investments. (ii) Empirical results Logit model is used to identify the determinants of the rms decision to use FX derivatives. Estimated results of models 1 and 2 are presented in Table III. The results of model 1 report that nancial distress costs, interest coverage ratio, size, asset growth over cash ow, protability and foreign sales have signs consistent with the theory, whereas managerial ownership and tax convexity have estimated signs contrary to risk management theory. According to nancial distress theory, corporations having higher nancial distress costs and less ability to pay its interest costs are more likely to employ foreign currency derivative instruments for hedging rm risk exposure and to avoid opportunistic behavior of debt holders. Outside directors emphasize value creation activities thus rms with smaller managerial holdings have fewer chances to make hedging decisions via derivative instruments in their own interest. Haushalter (2000) and Bartram et al. (2009) had also found a negative relationship between managerial holdings and derivative usage. In line with Howten and Perfect (1998), results show inverse relationship between tax losses and decision to use FX derivatives. Since tax losses reduce rms income gains, thus tax-benets acquired from unused tax losses are smaller than reduction in income gain, so it is not feasible for rm having unused tax losses to use FX derivatives. Empirical results of model 2 support our earlier results of univariate analysis. Similar to Nance et al. (1993), Fok et al. (1997) and Geczy et al. (1997), leverage depicts a signicant negative effect on rms likelihood of derivative usage. Hence,
Group A FDC INC SIZE AGCF ROA MNGRL TAX LFS Group B LEV MTB DP QR FDC 1.00 2 0.24 0.07 0.07 0.08 0.11 0.28 0.01 LEV 1.00 0.02 0.00 2 0.25 INC 1.00 0.05 2 0.07 0.35 2 0.15 2 0.27 2 0.13 MKBK 1.00 0.26 2 0.01 SIZE 1.00 0.03 0.23 2 0.19 0.10 0.11 DP 1.00 0.00 AGCF ROA MNGRL TAX LFS

1.00 2 0.06 0.10 0.11 0.09 QR

1.00 2 0.18 2 0.18 2 0.07

1.00 0.01 2 0.04

1.00 0.13

1.00

Table II. Correlation matrix

1.00

Model 1 Variables FDC LEV INC SIZE MTB AGCF ROA DP QR MNGRL TAX LFS Constant Predicted signs 2 2 2 / 2 2 / 2 Coeff. 2 2.743 2 0.011 0.123 0.087 2 3.122 2 0.008 2 0.527 0.304 1.128 p-value 0.000 * * * 0.026 * * 0.427 0.023 * * 0.066 * 0.079 * 0.062 * 0.000 * * * 0.266 2 0.933 2 0.0235 2 0.1337 2 0.2180 Coeff.

Model 2 p-value 0.036 * * 0.519 0.122 0.000 * * *

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1.769

0.000 * * *

Note: Signicant at: *10, * *5 and * * *1 percent, respectively

Table III. Logit regression

proving that high debt leads rm to more nancial distress and increases its cost of hedging, therefore making it difcult for a leveraged rm to bear higher risk management costs. Dividend payout ratio shows a negative effect on rms derivative usage, supporting signaling theory. Firms having volatility in cash ows are more likely to cut dividend amounts in advance so that at the end of scal year lower dividend payout ratio signals a weak nancial position of rm; consistent with Haushalter (2000). Generally, large size nancially distressed rms, having lower leverage, dividend payout ratio, liquidity, managerial ownership, protability and tax convexity are more likely to use derivative instruments for hedging purpose. 5. Conclusion Current study extends the existing literature by identifying factors inuencing rms decision to use FX derivative as an instrument for hedging exchange rate exposure of 86 non-nancial rms listed on Karachi Stock Exchange for the period 2004-2007. The estimated results support the hedging theory by Smith and Stulz (1985) that FX derivatives are used to enhance shareholders wealth by reducing rms FX exposure. In case of Pakistani non-nancial rms, coefcient of nancial distress, size, interest coverage ratio, protability and foreign sales are consistent, in terms of direction and magnitude, with the risk management theory. Contrary to nancial distress theory, negative relationship between leverage and rms derivative usage depicts that high leverage increases corporations nancial distress costs and decreases rms ability to bear high risk management costs. Firms having larger outsiders holdings are more likely to make hedging decision in the best interest of shareholders as companys nancial health signals their performance in the market. Tax convexity, measured by tax losses carry forward has negative impact on rms decision to use FX derivatives inconsistent with the risk management theory. This might be due to the inappropriate measure for tax convexity and the fact that cost of risk management exceeds the tax deductible benet of unused tax losses. Unexpected coefcient of dividend payout though inconsistent with the hedging theory but still supports the signaling theory. Growth options though shows positive effect on rms hedging policies, have

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insignicant effect on rms derivative usage to hedge exchange rate risk. Study also attempts to examine the relationship between corporate FX derivative usage and rms FX exposure, and a signicant positive relationship between rms foreign sales and their decision to use FX derivatives to hedge FX exposure is reported, despite of illiquid and amateur Pakistani derivative market. The estimated results provide the policy guidelines to the Pakistani rms having FX transactions, that the optimal usage of FX derivative instruments may enable them to smooth their future cash ows by reducing opportunistic behavior of shareholders and managers, hence, minimizing the agency costs of debt and equity. The ndings of current empirical investigation also suggest that the policy makers should develop a well-organized exchange traded derivative market in Pakistan for the benet of nancially constrained rms with highly variable cash ows and foreign sales. The study also highlights that effective usage of derivative instruments may enable corporations to dene their hedging policies that are compatible with rms internal investment and nancing policies. Therefore, properly planned and implemented investment, nancing and hedging policies, will not only facilitate rms in achieving their primary goal of shareholders wealth maximization, but may also enhance economic stability. The current study has identied the factors affecting the rms decision to use FX derivative instruments; however, future research could be focused on determining the factors inuencing the usage of interest rate derivative instruments and extent of such derivative usage.
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About the authors Dr Talat Afza (Professor of Finance) holds a PhD in International Trade and Finance and an MA Economics degree from Wayne State University, Detroit, USA. She also earned an MBA Finance degree from B.Z. University, Multan, Pakistan. She has taught at various prestigious universities including University of Michigan Dearborn (USA), Wayne State University, Detroit (USA), B.Z. University, Multan (Pakistan), University of Lahore (Pakistan) and Virtual University of Pakistan. Currently, she is working as Dean, Faculty of Business Administration at COMSATS Institute of Information Technology, Islamabad, Pakistan. Her areas of research interests include international trade and nance, money and banking, women entrepreneurship and nancial management. She has published more than 30 research papers in reputed national and international journals and a similar number of research papers were presented in national and international conferences. She has successfully completed a 16 months research project on Women Entrepreneurship funded by the Higher Education Commission of Pakistan and also supervised a number of research theses of MS and PhD students. Dr Afza is also a member of editorial boards and an active reviewer for a number of national and international research journals. Talat Afza is the corresponding author and can be contacted at: talatafza@ciitlahore.edu.pk Atia Alam is an MS Research Scholar at COMSATS Institute of Information Technology, Lahore. Her areas of research include hedging policies, derivatives, nancial restructuring and the bond market of Pakistan.

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