Hedging and Firm Value

Executive Summary

Problem Background: Risk by nature is unavoidable, as it is part of our daily lives and activities. From another perspective, it would be seen a tip of motivation that enables firms, individuals, financial and non-financial bodies to have a plan for future expectation such as: the level of investments, meeting up with stakeholders needs, protecting themselves from risk of bankruptcy, financial distress and underinvestment. Due to globalisation firms are eager to operate or trade with foreign countries and this exposes them to various types of risk like; interest rate, foreign exchange and commodity price risk. These risk are quite prominent especially foreign exchange risk as it involves fluctuation of currencies in different counties. This has however made firms to venture into risk management tool such as hedging to reduce the level of risk that affects their trade as it may have adverse effect on their firm value. This study focused on the impact of hedging in automobile industries over the years. The automobile industry is one of the major industry in the world and accounts for millions of production yearly. They have had their success stories as well failures too. As a business that trades worldwide, it is exposed to risk of currency difference which is also known as foreign exchange risk, market risk which results from the fluctuation in interest rate risk and finally commodity price risk. To prevent or reduce these risk, the automobile industry adopt hedging as a risk management tool. Hedging uses derivatives such as forward, future, options and swaps to carry out its process. Although researchers have proposed that hedging risk with derivatives have a positive impact on the value of the firm of which as opposed by other researchers saying that there is no difference between firms that hedge and firms that do not hedge. This was judged with the fact that hedging is different for various firms and they risk are exposed to.

Another problem is that are less research on hedging that lays emphasis on the automobile industry. Although there are numerous researches on hedging but not much focused on the various risk that affect the automobile industry and their use of derivatives.