CURRENCY DERIVATIVES AND FIRM VALUE OF MULTINATIONAL CORPORATIONS: A LITERATURE REVIEW
Ong’eta, Jackson Oyaro
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Exchange rate risk is a major problem for firms that deal in international business, which may affect their financial value. International business managers have to make an effort to mitigate this exchange rate risk. Foreign currency derivatives is one method of reducing the exchange rate risk in an effort to maintain and enhance the value of firms. The purpose of this paper was to review empirical literature to establish the relationship between the use of foreign currency derivatives and the value of multinational firms. The paper was a critical review of empirical journal articles to establish the relationship between the use of foreign currency derivatives and the value of multinational firms. The study examined the meaning of derivatives, derivatives usage and the relationship between derivative usage and financial performance of multinational firms. The study concluded that firms use derivatives to reduce foreign exchange rate risk. The major determinants of derivative usage include; under-investment, size of firm, debt, investment growth, liquidity, cost of hedging, profitability, and developed derivatives market while managerial ownership was not a determinant. Many studies showed that there was a significant positive relationship between derivatives usage and firm value but only a few had either negative relationship or a positive relationship that is not significant. It is expected that the findings of the study will justify the usage of derivatives in order to enhance the value of the firm.
- School of Business