Case Analysis MBA 555 Managerial Economics By: Brian Dungey, Faith Kaplan, Ryan Litwin, John Messere

 What is corporate hedging? ◦ Corporate hedging employs the use of one or more of the mentioned financial instruments to minimize the potential negative impacts of a firm’s exposure ◦ Foreign currency hedging ◦ Derivative methods ◦ Interest rate hedging

◦ M&M (1958) ◦ Smith and Stulz (1985)  Explains how hedging can affect firm value

◦ Corporate Taxes ◦ Costs of Financial Distress ◦ Underinvestment Costs ◦ Foreign Currency Exposure ◦ Other Motives  Size

 Determine which factors are important in foreign currency hedging decisions

 Early Studies – investigate a broad range of exposures when trying to find hedging determinants  Recent Studies – have focused on a particular exposure E.g. foreign currency exposure  Most Recently – scholars have focused on how foreign currency debt is used to hedge against foreign currency exposure

 Sample size 366 firms all having some degree of foreign currency exposure  Multivariate tests – includes foreign currency hedgers and other hedgers  Exclusion of other hedgers  Multivariate test – for currency only hedgers  Robustness tests

 Multivariate Regression Analysis ◦ Logistic Regression  Likelihood that a firm hedges foreign currency exposure and proxies for incentives to hedge. ◦ Coefficients & Elasticity  Significance and Importance

 Test 1 ◦ Include interest rate/commodity price hedging firms  Test 2 ◦ Does not include interest rate/commodity hedging firms  Test 3 ◦ Firms that only participate in foreign currency hedging (44% of hedgers)

Elasticity Rank (Importance)Test 1Test 2Test 3 Tax Loss443 Interest Cover Credit Rating Net Interest Receivables Gross Leverage Industry Adjusted Leverage Net Leverage332 Foreign Currency Transactions221 Cash Ratio554 Firm Size115

 Foreign Currency Hedgers ◦ Currency Swap versus Foreign Currency Debt ◦ Affects on potential profits from exchange rate changes  Liquidity, currency exposure, and size.  Relationship between higher financial distress costs and foreign currency hedging.  UK firms versus US firms.  US Tax benefits to debt.