An Empirical Study On The Influence Of Foreign Currency Derivatives On Corporate Value

In the1970s, along with the disintegration of the Bretton Woods system, the exchange rate and interest rate fluctuations that foreign enterprises faced kept increasing. More and more enterprises began to use financial derivatives to manage corporate risks. However, due to the high leverage and complexity of financial derivatives, they can also lead to huge losses to enterprises.Especially in China, the examples of huge losses caused by financial derivatives were familiar, however the in-depth analysis about the use of derivatives is lacked. Foreign exchange derivatives, as the one of the most widely usedderivatives in China, has become the choice of as many multinational enterprises to avoid exchange rate risk. Here are the questions. What factors determine the enterprises to use foreign exchange derivatives to hedge? How to evaluate the effect of foreign exchange derivatives? Whether the use of foreign exchange derivatives increases the value of the enterprise?In this paper, we have compared the global foreign exchange derivatives market with the domestic market and we have also collected the financial data from583listed companies in2012from Resset as well as the annual reports to analyze the effect of foreign exchange derivatives on corporate value. The analysis was conducted by the following steps:First, by the comparison with global foreign exchange market, we figured out the problems existing in the domestic market and made clear how to develop the foreign exchange market in China. Second, we chose583listed companies as sample and tried to find out the determinants of corporates’incentives to use derivatives. As foreign exchange derivative is the research subject, all the listed companies are multinational with revenue from overseas more than10%that of the total revenue. Third, we conducted an empirical study on the influence of foreign exchange derivatives on corporate value and the sample is the same as that in the last chapter. The final part is to sum up and come up with several suggestions about the development of the foreign exchange derivative market in China.Through empirical study, we have found that the factors that affect corporates to use foreign exchange derivatives mainly include company size, overseas revenue ratio, debt ratio, quick ratio and executive compensation. The value of multinational corporates has increased by the use of foreign exchange derivatives, and the premium is about12%. The conclusionderived from the paper can provide reference for the development of domestic foreign exchange derivatives and more possibilities for corporates to manage market risks. Investors can have a better understanding of the value of derivatives.