Using Derivatives for Hedging and increasing firm's value DISSERTATION SUPERVISOR: Dr. Ullas Rao Dissertatio

Interest rates, currency rates, and commodity price risk are only a few examples of modern business devices used to protect against financial risks. Such hedging and Increasing activities increase firm fees by mitigating market flaws, providing a motivation to hedge. Derivative instruments, however, can also be utilised for speculating and hedging, increasing risk and likely lowering corporate value.

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DISSERTATION TITLE: Using Derivatives for Hedging and increasing
firm’s value
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Masters Dissertation
Using Derivatives for hedging and increasing firm’s value
Submitted by
Rohan Aji Kumar
H00364142
Under the guidance of
Supervisor: Dr. Ullas Rao
Word count:
Dubai, December 10th 2021
Table of Content
2

Declaration 4
Acknowledgment 5
Abstract 6
Chapter 1: Introduction 7
1.1 The rationale of study 7
1.2 Empirical Testing 7
1.3 Determinants for the use of derivatives 8
1.4 Classification of Derivative markets 8
1.5 Option Hedging 9
1.6 Hedge and its benefits 10
1.7 Objectives of the study 12
Chapter Scheme 14
Chapter 2: Risk management by using Derivatives 15
Chapter 3: Literature Review 17
3.1 Theory of Hedging and it’s determinants 17
Chapter 4: Research Methodology 26
4.1 Sample Selection 26
4.2 Dependent Variable 26
4.3 Control Variable 26
4.4 Propensity matching methodology 27
4.5 Hypothesis 28
Chapter 5: Data Analysis 29
Chapter 6: Findings and Conclusions 31
6.1 Findings 31
6.2 Conclusions 31
Reference 32
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Declaration
I declare that the research work undertaken for this Master dissertation has been
undertaken by myself and the final dissertation produced by me. The work has not
been submitted in part or in whole in regard to any other academic qualification.
Title: Using Derivatives for hedging and increasing firm’s value
Name: Rohan Aji Kumar
Date: 10/12/2021
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Acknowledgement
I would like to thank all the people who. Helped and supported me through the
process of writing dissertation. Firstly, I would like to thank my parents who were
there for me the whole time supporting and motivating me in my good and bad day.
After them, I would like to thank Dr. Ullas Rao who I was very lucky to have him as
my supervisor for the advices and corrections that I got from him. At the end I want to
focus on my friends who were a great source of motivation that helped me to write the
masters dissertation on time.
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Abstract:
Contemporary commercial enterprise contraptions to hedge financial dangers include rate of
interest , rate of exchange , and price risk associated with commodity . Such hedging things add
to firm fees by assuaging market imperfections, which affords an incentive to hedge. However,
derivative contraptions can also be used for speculation and hedging, magnifying risk and
probably decreasing company value. The attention of derivatives' effectiveness at various
financial intervals or in several industries is also of value, and it can ultimately result in better
hedging and even hypothesis strategies. In this dissertation, we inspect non-financial
corporations in India developed countries from 2011 to 2020 and apply fixed outcomes
regression analysis, propensity score matching and difference-in-difference models to examine
the relationship between derivatives usage and company value. The effect of unique categories of
derivatives usage on firm value varies with the aid of the country. In particular, even though
interest derivatives damage association cost worldwide, forex derivative utilization seems to
enlarge company value.
Keywords: derivatives, hedging, risk management, association value.
Chapter 1: Introduction
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Due to the growing lookup attention, an awful lot of interest is paid to the monetary instrument
or use of derivative because of their growing recognition in the companies. The Derivatives are
monetary investments such as preferences and futures, which helps hedge the financial chance
from surprising adjustments in hobby rates, alternate charges and prices of the commodity. Firms
are using economic instruments for hedging the exposure to different hazards towards amplifies
their value. Much debate is going on the effectiveness of derivatives on threat management and
cost creation.
1.1 The rationale of a Study:
The spinoff market as a counterpart of the safety market has been popular worldwide, and even
there is a cognizance amongst creating nations about derivatives markets. The introduction of
Derivatives additionally generated worries for policymakers, practitioners and regulators
concerning its impact. Financial instruments are urbanized as extra classy and advanced tools for
managing risk. However, still today, market funders now are so acquainted with derivatives
usage. Lack of grasp of markets and of a handy relation to those doing the daily trading have also
stalled the boom of these financial markets.
Absence of perception of in what way the derivatives in trading markets are operating is an
important barrier in the forthcoming & preferences marketplace in United States as trading of
derivative is a great-risk trading tool and it’s a new area in the capital market scenario of India.
This one is fundamental to comprehend unique feature of the derivative goals and possibility, the
types of dangers related, and the approaches and potential of minimizing these risks. Even after a
time after more than 10 years from familiarizing derivatives, marketplace partakers, particularly
merchandising single financiers, are no longer acquainted with derivatives principles. Due to the
absence of such focus and insufficient obligation, derivatives may result in various particpants
who burn their fingers.
However, they take leveraged positions for speculation and abuse derivatives by incurring
significant losses. For this reason, investors need clear guidance on risk management practices.
Therefore, it is necessary to investigate investor perceptions, perceptions and attitudes towards
hedging and speculation and identify knowledge gaps between investors in derivatives. We also
need to understand investor guidance on derivative trading and suggest avoiding high losses
from speculative trading.
1.2 Empirical Testing of the Relationship between Derivative Hedges and firm value:
As validity of hedging theory has already been tested and confirmed in previous studies. The
results of previous studies show that corporate risk management is well suited to increasing
corporate value. In addition, if there are market flaws such as bankruptcy costs, convex taxation,
and underinvestment issues, hedging is rational, such as various types of research so far. These
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topics are popular among researchers and practitioners. We have been working on achieving
various economic goals, and previous literature has provided inconsistent results on this topic.
1.3 Determinants for the use of derivatives:
In reality, businesses had to face taxes, various cost of agency, difficulties associated with
finance, and asymmetry of information that interrupt the Modigliani Miller theory of hypothesis.
In such an imperfect market, individual investors struggle to recreate risk management strategies
in their accounts. Therefore, many researchers suggest that imperfect markets create solid
exposure to hedging activity. There are five main classes of market flaws.
1. Information asymmetry and agency costs.
2. Raise funds for emergency costs.
3. Management risk aversion.
4. Corporate tax
5. Sub-investment
The above five criteria contribute to broader risk exposure and management outlook than
individual investors. Hedges mitigate information asymmetry in two ways by smoothing cash
flow volatility and fairly assessing the quality of management. First, goodwill is the expected
value of future cash flow. As a result, information asymmetry can affect an investor's view of
future cash flow and negatively impact corporate value. Since Dart et al. (2002), The use and
scope of derivatives suggest reducing cash flow variability and, as a result, reducing information
asymmetry by making future cash flows more predictable.
Therefore, small businesses are likely to be incentivized to use hedging to reduce information
asymmetry. Alternatively, many studies suggest that large companies are more likely to use
derivatives. This is probably due to the more resources of large companies and the subsequent
use of specialists who can apply stronger hedging strategies, Adam etc.
1.4 Classification of Derivative markets
Derivatives Markets Financial markets can be divided into specialized stock exchange markets
and counter markets.
DERIVATIVES MARKET
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Exchange Traded Market Over the Counter

Exchange-Traded Market:
Derivative exchanges are markets where individuals trade standardized contracts defined by the
exchange. The futures exchange acts as an intermediary for all related transactions and receives
initial margin payments from both sides of the transaction as a guarantee. The exchange offers a
visible and transparent market price for derivatives. They set the institutional rules for
transactions and the flow of information about transactions. These are closely related to the
clearing house that handles the post-transactional activities of listed securities and derivatives.
The exchange centralizes the transmission of bids and ask prices to all direct market participants
who can respond by selling or buying one price or responding at another price. With the advent
of e-commerce, it is no longer necessary to make an exchange a physical location. In fact, many
traditional retail floors are closed.
1.5 Option hedging:
A more expensive alternative to futures and futures contracts is currency options. They have the
advantage of protecting themselves from losses below certain unfavorable exchange rates, but at
the same time do not take advantage of the opportunity to profit from the favorable development
of the forex market.
An option is the right to buy (call option) or sell (put option) the underlying asset at a specific
price (strike price), but it is not obligatory. There are several types of options, but only plain
vanilla options are discussed here. The company has three options to protect itself. You can buy
protection at the current exchange rate, and the money option allows you to buy protection (from
money) at a lower exchange rate. Finally, he could also buy protection at a (cheaper) exchange
rate than the spot rate. Option premiums vary between these options, with out-of-the-money
options being the cheapest (because they are worthless if they expire at the current rate).
In contrast, the spot price is higher than the strike price, so the premium for in-the-money
options is the highest. Derivatives can be categorized as either trading or over-the-counter
(“OTC”). Exchange-traded derivatives are traded on regulated exchanges 57. These exchanges
act as intermediaries between the parties and guarantee the settlement of contracts through a
central payment system called the "clearinghouse". Only highly standardized, substitutable and
fluid contracts are traded on the exchange. Many of the basic conditions of exchange-traded
derivatives are not subject to negotiations between the parties.
On the other hand, bespoke, highly personalized derivatives are traded over-the-counter. OTC
derivatives are bilaterally negotiated between counterparties and tailored to the needs of the
parties. The unregulated nature of OTC derivatives contributes significantly to its popularity,
resulting in the OTC market being many times larger than the exchange-traded fund market.
Most credit derivatives are traded on OTC, with CDS being the most popular. CDS is a bilateral
contract in which the protection buyer pays a premium to the protection seller in exchange for ,
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and the protection seller compensates the protection buyer in the event that the underlying asset
is hit by a credit event. Underlying assets can range from a single corporate issuer or government
debt to an index associated with that debt.
1.6 Hedge-its benefits and regulation :
Benefits of hedging with credit derivatives:
Credit risk is one of the most common risks for businesses in their day-to-day operations.
Manufacturers who sell their products to their customers with credit bear the risk of not paying
for the goods. Similarly, banks offering millions of dollars in loans are concerned that companies
may fail to repay their loans. In both cases, manufacturers and banks are exposed to credit risk.
Credit derivatives are suitable for hedging against credit risk because they can separate credit
risk and trade it separately from the underlying asset or loan. Prior to developing credit
derivatives, banks and other financial institutions addressed these concerns about the possibility
of default by synthesizing credit, thereby minimizing exposure to a single borrower.
However, credit derivatives can allow businesses to maintain customer relationships and expose
them to credit risk. However, it protects your risk by transferring credit risk to someone who can
take the risk more efficiently. The impact of this risk transfer is significant. First, it improves the
productivity of the company. This allows companies to focus their energy on their core business
and not worry too much about the impact of credit losses on their business. Also, by offsetting
credit risk, corporate hedging with credit derivatives can reduce revenue volatility and make it
easier to plan aspects of the business. This reduces the costs associated with running your
business and allows your company to run more efficiently. Benefits of Eliminating Credit Risk
That Business Is ill
Those who are ready to process bring results that go beyond the company in question. By
focusing more on the major businesses in particular, the company can be more innovative in the
major industries and better in a better position to deliver goods and services at lower costs.
Second, the transfer of credit risk increases market liquidity. Credit derivatives allow banks and
other lenders to extend low-risk loans by default. In this way, lenders are more aggressive and
can l. Borrow more money for additional business.
Basic functions and usage:
The basic purpose of these secondary products is to hedge the risk. Most derivatives are used to
exchange the underlying financial product or financial risk inherent in the product with a third
party who is willing to accept the risk. The buyer or seller of a transaction bears the risk of
ensuring speculative or opposite exposure. Few older derivative products have been rediscovered
and promoted since the early 1980s.
There are new products designed to help borrowers and investors deal with fluctuations in
interest rates, exchange rates, commodity prices and stocks. As a general rule, portfolio
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managers can take the risk of raising funds through the cash market without using financial
derivatives. For example, owners and investors can diversify their currency exposure by holding
assets and liabilities in different currencies. Companies that cannot secure attractive interest rates
to meet their future funding needs can release their debt in the cash market before they need to
raise money. However, in reality, the transaction costs of a cash market strategy can be daunting
and you need to maintain a liquidity position in the market.
The role of protection in the enterprise: Hedges play an important role in corporate value.
Goodwill is the economic value of a company. This type of economic indicator reflects the
overall value of a company in the market, including the value attributable to shareholders and
debtors. Goodwill isn't just the price you can afford for this business. This includes structure,
terminology, guidelines and more. In current financial theory, Pandyy (2009) states that the value
of a company can be calculated in a variety of ways. The most common method used is present
value (net value). But this is not the reason why the same company can have different values. It
does not depend on the evaluation method used. This is usually caused by various payment
terms, operational assumptions, transaction structures, and so on
The discount rate is usually the return of the average investment to the market with the same risk
as the investment for which the present value method is being considered. Damodaran (2006)
stated that corporate value is very important to everyone involved in the business, as it is a very
important factor in making decisions about wealth creation. The main determinants of the value
of a form are leverage, profitability, risk management, growth options, company size, and
financial constraints. Use and Growth of Financial Derivatives: Financial derivatives are
secondary products that depend on changes in the value of the underlying financial product.
Financial derivatives are usually linked to major financial products or indicators (forex,
government bonds, corporate bonds, certificates of deposit, stock indexes, interest rates, etc.) or
products. They generally do not transfer the underlying major commodities or raw materials at
the beginning of the contract. "Option like" or "forward like". The option gives the holder the
right, but not the obligation, to buy (or sell) a financial instrument or merchandise at a fixed price
specified on a future date. A forward contract is an obligation to buy (or sell) a futures financial
instrument or commodity at a specified price. Significant risks relate to the derivative risks and
potential risks to the financial system of the sole proprietor, who is a derivative dealer. At the
sole proprietorship or other user level, there are some recent cases of significant financial losses
from derivatives in complex and highly leveraged transactions. Well-known cases include
Codelco, Metalgesellschaft, Procter and Gamble, Gibson Greeting Cards, and Orange County,
California. Users of derivatives need to be more disciplined and are more aware of their
administrator's vigilance and responsibilities. Industry sources have suggested some "best
practices" for using these tools in the Group of Thirty (1993) report. It also discusses the issue of
systematic risk, the possible impact of derivatives on the financial system as a whole. Questions
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have been raised about scenarios where derivatives can cause widespread disruption to the
financial system. One of the key areas is focused on high grade.
1.7 Objectives of the study:
The study`s objective is to establish the effect of derivatives on the financial performance of
companies listed in NSE. Specific objectives: The specific objectives of this study were to:
1. To determine how the risk management in derivatives affects the financial performance of
companies
2. To examine if efficiency in trading derivatives affects the financial performance of
companies.
Conclusion:
This chapter introduces the subject and field of study. This chapter provides a basic overview of
the derivatives market and the products traded in the derivatives markets. There is also an
overview of the purpose and background of the research. It provides the historical development
of the derivatives industry at the global and domestic levels and the latest trends in the
derivatives market.
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Chapter Scheme
Chapter 2: Risk Management by Derivatives
Chapter 2 provides an overview of the capabilities of financial derivatives and the risks
associated with using them. This chapter also described pricing the derivative risk management
concept. This chapter also described option strategies under various market conditions.
Chapter 3: Literature Review
This chapter contains literature reviews that set the academic tone of your research. It provides
an overview and extensive discussion of the rich and diverse literature available in the field of
derivatives. It discusses extensively a detailed review of the growth of derivatives markets
abroad and India.
Chapter 4: Research Methodology
This chapter describes the research objectives, hypotheses, scopes, limitations, and research
methods used in this research to collect and analyze data. This chapter presents research
methodologies for the preparation of a dissertation. Secondary data was collected from various
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sources such as databases, journals and websites. The sample design is based on representatives
of a population of NBFC’s in India.
Chapter 5: Data Analysis and Interpretation
This chapter uses data from secondary sources to analyze individual investor preferences for
derivatives. Data analysis is an important part of any research. The data collected is carefully
processed, systematically categorized and scientifically tabulated. This chapter also provided a
detailed analysis of the strategies proposed for clients selected for risk management strategies.
Chapter 6: Findings, Conclusions, and Recommendations
This chapter provides insights and highlights the results of your research work based on your
interpretation of the data. Therefore, appropriate recommendations are suggested. The scope of
further research areas was also outlined.
Chapter 2: Risk Management Using Derivatives
Derivatives are often traded for increased risk for hedging (risk reduction) or making money, the
value of which it depends by the supply and demand of the underlying asset. The use of
derivatives in Czarnikow is primarily related to currencies and commodities. However, the
market is readily available with the underlying assets in bonds, interest rates and market indexes.
Derivatives can be used to hedge positions in many ways, estimate future prices and performance
of assets, and provide leverage. Historically, derivatives have been created to support trading in
various currencies worldwide. As goods are more frequently traded across borders, the need for a
balanced exchange rate system became vital, as traders worldwide needed a process to help them
manage price differences depending on the to eliminate this risk, the investor could buy a
currency derivative to secure a fixed exchange rate and secure their funds.
Risk management plays an important role in the financial industry, it is also an integral part of
risk management. Markets and risk management practices always grow with the growth in the
business. The progress in the business and the market expansion poses a challenge for the risk
management. As a result, financial instruments that evolve in managing risks that are financial
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derivatives. Rao (2012) found that derivatives is a contract whose return depends on the
underlying asset's value. Emira Kozarevich et al. (2014), derivatives are defined as securities
whose value depends directly on the underlying asset. Assets include commodities, bonds,
exchange rates, stocks, and weather disasters (Hanic, 2014). Malleswari (2013) stated that the
different process of contract are available, but most of the common forms of contracts include
the futures, options, forwards, and the swaps.
A financial derivative is a tool used by firms to the manage risk. In simple words, it is utilized
for hedging risk which the company faces. There are two vital functions that financial derivatives
play that is speculation and hedging. Hedging instruments are utilized in order to reduce the risk
level which is attached including the transactions that underlie (Hausin et al., 2008). The hedgers
always seek to ensure that their assets or liabilities are protected from the adverse changes by
entering into derivatives. The speculation envisions the financial risks with the projected gains
from the market fluctuations (Dunbar, 2016). Hedging and the speculation are two aspects of the
similar coins (Chui, 2012). Therefore, the financial derivatives play an important role in the risk
management. The proper use of the financial derivatives lowers the level of risk and increases
the returns. In this way, it helps to improve the financial condition and climate of the company.
All companies operating globally and domestically were considered to be at some risk. Market
risk is the risk when the commercial risk can be efficiently diversified from other types of risk,
especially credit and the operational risk. As, the number of cross-border transactions grows, the
central role of market risk should not be ignored. The existence of market flaws, financial
difficulties, agency and tax-related issues are very costly for companies that allow them to hedge
their risks and add value to them (Muller and Verschoor). 2005). Financial distress happens
when a company is incapable to meet its monetary obligations. But with the help of derivative
products, you can reduce costs.
Therefore, very illiquid and highly leveraged companies can get incentives for the financial
derivatives with the help of risky hedging activities. Due to conflict between the management
and the shareholders, the agency problem is expanding, leading to the problem of investment
shortage. This problem can be solved with the help of hedges that redistribute money. Similarly,
companies with convex tax obligations have incentives to use financial derivatives. Under the
convex function, the company's profitability is near to zero. Therefore, it’s in company's interest
to use hedging activities to mitigate the risk.
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Chapter 3: Literature review
This section gives a deep overview of relevant literature related to the research question. The
literature review contains a complete description of the derivative theory hedging and the
empirical research findings. The first subchapter of this chapter consists of determinants of
derivative hedging. In contrast, the second chapter focuses on derivative hedging, firm value, and
relation.
3.1 Theory of Hedging and its determinants.
Smith and his determinants: Smith and Stulz (1985) discovered the maximization of its value.
The company hedges for three main reasons: NS. Taxes, financial emergency costs Management
risk aversion. The reason for this is as follows: The reason for the press.
1. Tax:
Researchers have shown it when effective Marginal tax rates on businesses enhance their
function, the pre-tax value, and the company's post-tax value, is its convex function.
Value before tax.
2. Cost Economic Emergency:
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Coverage By going down, you reduce your company's chances of getting into financial
difficulties. Fluctuations in goodwill reduce expected financial costs necessary.
3. Management risk avoidance:
The manager has a large stake in the company and can expect the company to secure
itself; the manager's wealth is even higher because it is a linear function of its value.
There is a high possibility that the company's economic value will be secured as a
shareholder. The managed asset is a concave function of goodwill. Besides, the risk-
averse manager suggested that the compensation contract was approved by Accounting
income.
Froot et al. (1993) stated that the more closely correlated their cash flows have future investment
opportunities, the more they hedge. It is corroborated that with the help of a developed model in
this article. Through a descriptive study, a researcher has concluded that hedging can solve the
underinvestment.
DeMarzo and Duffie (1995) formulated that hedging increases the informational contents in the
company's profit and reduces the noise volume. DeMarzo was the one who came up with another
theoretical perspective hedge and closed gaps between factors related to business value Fixed
and financial security.
Gay and Nam (1998) are pleased with their research Using derivatives by analyzing
underinvestment. They closed the hypothesis of underinvestment and maximization of
shareholders. He closed for the company Have more investment options, and if so, use more
derivatives. The cash level is low.
Tufano (1996) concludes that researchers designed the two categories of hedge incentives. The
first is maximizing shareholders' hypothesis, and the second is maximizing the management
profit hypothesis. Financial hedging policies can resolve information asymmetries. Hedging
refers to red or red-based techniques, eliminating the risk of financially significant movements.
Currency hedging is an attempt to hedge a company against the exchange rate in the opposite
direction of position in the futures market through a targeted accounting takeover Position in the
corresponding currency. That means investing negatively in something else Correlation device in
the hope of reducing the risk of Unfavorable changes in the money markets.
(Hull, 2011, p. 485) The first and most important reason to mitigate risk Hedges is to guarantee
contractual foreign currency debt. In financial difficulties, there are some peripheral risks at the
company's headquarters. Do business and prevent him from fulfilling his contractual
obligations.
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Moreover, If the company has some insurance, the need for compensation is emphasized. The
trade sensitivity to exchange rate fluctuations offsets the sensitivity of the core business to such
movements. (Daigler, 1994, P.159160)
Nonce etc. (1993), Discovered that hedges have more convex taxes Time plan. Companies using
hedges include more tax credits. Instruments COMPUSTAT data was used to use convertible
bonds. Preferred stock and asset liquidity. They again, Use hedging tools to reduce cash and
increase dividends.
Supavanji and Strauss (2010), through analysis 1994 2000 S & P 500 corporate hedging
relationship. They stated that increases in the CEO.'s compensation are directly related to
derivative use by the firm.
Mariana, Antonio, Elisio (2015). This study had shown the impacts of risk management with
derivatives on a firm's market value using a sample of NFC listed in that FTSE 350 share. A
researcher has addressed how hedging strategies with derivatives affect a firm's market value
with the help of univariate tests along with extensive descriptive analysis.
Mariana. V. N., Antoni. C, Elisio B., (2015). Derivatives and goodwill hedging. Evidence For
non-financial companies listed on the London Stock Exchange.
Honey, Alkyne, Ilmas (2014). This study shows the effect of Hedging financial derivatives
against corporate value and finance Performance according to new records that bring information
to 288. handicapped A non-financial company listed on the London Stock Exchange since 2005.
Focus on forex, interest rates and commodity price hedging Risk of futures, forwards, options
and swap contracts.
Honey, Alkyne, Ilmas (2014). The results show that risk management practices are significantly
different between financial risk and derivatives and derivatives used for hedging. This research
paper is Derivative contracts in the risk management process of non-financial Greek institutions
Potential impact on a company and its corporate value. The survey sample is of the 81 Greek
non-financial companies exposed to the financial risks listed in Athens Stock Exchange.
According to International Financial Reporting Standards (IFRS), their annual report must be
published in 2004-2006. The subject of the survey Derivative hedging significantly increases
goodwill as many are associated with it. Did the study prove, or is the Hedge worth it? Goodwill
can be fixed and traced back to management or other motivations.
Hedging corporate risk through derivative contracts has become more and more popular over the
last decade. This development is directly related to the gradual shift in interest in volatility
Financial and capital markets worldwide and their decisive effects on business performance and
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profitability fluctuations. It's always transforming the financial environment and revitalizing
companies in this era. Globalized markets are identified and managed your company's exposure
to sources at the management level Exchange rates, interest rates, equity, The price of the item.
There has been a lot of research in the last 20 years Trying to analyze the determinants and
theoretical motivations behind the business Relationship between activities and such other
organizational aspects Company capital structure, level of leverage, investment Opportunities for
political and corporate growth. However, the scope of the investigation is limited as to whether
derivative hedging is worthwhile Increase in business activities of non-financial companies and
their impact on a fixed value. The main drawbacks of applied research on derivatives by
companies have limited information about hedging. The position of the company. Until recently,
with the lack of available data, companies in most countries didn't have to. Publicly disclose
either the risks they face or their actions to manage the risk. The United States has been a big
exception since the beginning of the year. In the '90s needed to retain information about their use
of Off-balance sheet risk and risky financial instruments. The concentration of credit risk.
The recent convergence is how corporate financial statements are prepared and presented,
leading to the International Financial Reporting Standards (IFRS) Members of many countries
around the world and Greece and the Eurozone.
According to IFRS, companies need to disclose whether they are using derivatives or not for
hedging or trading. It will help if you bid with the full range of risks exposed to take appropriate
action.
Schoenke. B (2011) used 47 large NFC samples Country. We investigated the impact of
derivatives on a company's risk and value. They use financial derivatives to Reduce both overall
and systematic risk. The impact of derivatives on the enterprise's value is positive, but it is highly
endogenous, and variables are likely to be omitted.
Yusuf Ayturk (2016) used finance Derivatives and the impact on goodwill of Turkish non-
financial companies. From 2007 to 2013, only 36.41% of companies used derivatives for
hedging. Current interest rate. Hello The use of derivatives and goodwill, and the overall
consequences, Derivatives do not affect the goodwill of the Turkish market.
In their study, Ali.M, Michael.D (2013) Interest rate derivatives implemented by creditors and
the impact of interest rates Derivatives used voluntarily for goodwill. Results of empirical
research I strongly supported the discussion on this point. They are the financially great
Statistically positive impact of compulsory interest rate derivatives on businesses is valuable and
has no significant impact from voluntary action.
Shalini H, Ravendra P (2014), last 10 years Experienced multiple increases in world trade and
business volume for A wave of globalization and liberalization around the world. This is demand
19

Significantly increased for international money and financial products global. The basic purpose
of these devices is Future date price commitment to protect against adverse effects reduce future
price fluctuations and the scope of financial risk. Financial derivatives are becoming more
popular. Most commonly used in finance, it is growing rapidly worldwide. It is now called the
derivative revolution. Appearance and growth in India Derivatives markets are relatively new
since the futures market has grown exponentially since June 2000. The amount and number of
contracts traded.
Borokhovinch et al. (2004) Investigate external influences: A director involves the company to
hedge interest rate risk.
Danani etc. al. (2007) relies on a survey sent to 564 non-financial companies listed in the United
Kingdom. The company checks to see if the tax and regulatory framework is controlled.
Reported revenue changes, various incentives for management, levels of profitability, Reducing
the potential for financial distress is among the relevant reasons. It Justifies the manager's
decision regarding interest rate hedging.
Manda Joseph, Lakshmi (2019). Research continued on Financial derivatives with a focus on
futures and options. Derivatives Original products resist changes in the value of bonds,
currencies, stocks, and stock indexes. Derivatives Market Stand Associate Progress towards the
cash market. Roughly its daily gross revenue gives the equivalent phase of the cash market. In
the cash market, an investor must pay total cash. However, investors need to pay premiums or
margins about the total money level in derivatives. Contract size should be decreased because
small investors cannot bear this quite a bit of gigantic premium. Risk is the characteristic feature
of most commodity and capital markets. Variations in prices of agricultural and non-agricultural
commodities are induced, over time, demand-supply dynamics.
The past two decades have witnessed a manifold rise in international trade and business volume
due to the wave of global and liberal sweeping worldwide. This led to rapid and unpredictable
variations in financial asset prices, interest rates, and exchange rates, exposing the corporate
world to unhealthy finance risk. In the present research highly uncertain business scenario, the
importance of risk management is much greater than ever before. The emergence of the
derivatives market is an ingenious feat of financial engineering that provides an effective and
less costly solution to the risk embedded in the price unpredictability of underlying assets. In
India, The emergence and growth of derivatives markets is a relatively new phenomenon. Within
8 years, derivative transactions in India outperformed the cash segment in terms of sales and the
number of contracts traded. Market sales increased from Rs 2.365 trillion in 2000 to 2010 Rs
82.20 Crore. The scope of the current research Analysis of the historical roots of derivative
transactions and the types of derivatives Products, regulations, policy development, trends and
20

growth, outlooks, Challenges for the Indian derivatives market. There is also space for a brief
discussion of the state of the global futures market Indian derivatives market.
Risk is a characteristic of all raw materials Capital markets. Agricultural and non-agricultural
changes over time Commodity prices result from the interaction of supply and demand Powers.
In the last 20 years, it's been over many times international trade and business volume due to the
ever-growing wave of globalization and global liberalization. This will be financial. The market
is experiencing rapid exchange rate and interest rate fluctuations, demonstrating the importance
of risk management in hedging against uncertainty. Derivatives must be an effective solution for
the risks caused by the uncertainty and volatility of the underlying asset. Derivatives A risk
management tool that helps organizations transfer risk Effectively.
Derivatives are products with no independent value, and Their value depends on the underlying
asset. The underlying asset is Financial or non-monetary. This study Derivative transaction by
tracking its historical development, transaction types Derivative products, regulations and policy
developments, trends and growth, outlook and challenges for the Indian derivatives market.
This study is divided into four parts. Part I Study concepts, definitions, functions, and types of
financial derivatives. Part II is dedicated to discussing Derivatives market growth, regulation and
policymaking. Part III describes the status of global futures market visas. Indian derivatives
market. In the last section, a summary and Conclusion First study on the contribution of
derivatives to Value maximization was performed by Allayannis and Weston [Allanyannis /
Watson, 2001]. Your item uses currency derivatives and fixed market value. Let's look at the
foreign currency derivatives and their practices in the NFC sample. Affects goodwill 1. They are
coverage and Fixed value. The impact of using derivatives is statistical and economic. There is a
currency risk, and the amount is 4.87% of the company's value.
A very extensive study by (Bartram 2003) A sample of 7,319 non-financial companies in 50
countries shows many uses. Derivatives outside the United States The hypothesis is that hedging
is an organized means of adding value. Result Shows very high corporate value for hedging
interest rate risk Evidence related to foreign exchange risk in all countries It's also positive but
weak.
Another empirical study using the same methodology US oil and gas producer Jin and Jorion [Jin
/ Jorion, 2006] The use of derivatives reduces a company's stock price sensitivity to the oil. And
in contrast to gas prices and previous studies, derivatives turned out to be not. It has a great
impact on the value of the company. The main contribution of the research is new, a simple
guess from Tobin's Q on behalf of goodwill Results of analysis showing that the use of
derivatives is not important Value-related (gas price hedging leads to a 3.7% discount on
goodwill, Oil hedges, on the other hand, increase goodwill by 0.7%, but neither is statistical.
meaning). Can't support the hypothesis that a company has a commitment Author attributes that
21

are highly valued compared to companies that do not secure themselves Establishing protection
for the personal benefit of the management team. For premiums documented by other studies,
Due to information asymmetry and operational security, this affects the company's value. Still,
there is a random positive correlation with the usage of derivatives.
Beatty, Petacchi, and Zhang (2011) Reward corporate commitment to interest rate hedging
(IRPC) through cuts The LIBOR spread recorded in the credit agreement. We show such rewards
from Shareholders' views on documenting the positive impact of IRPC Fixed value.
In addition, this study is consistent with Nini, Smith and Sufi (2012). Despite the existing
conflict of interest between cases, such as imposing IRPC on shareholders and debtors. The
indirect impact of the debtor on financial decisions is profitable Increase the value of
shareholders and the company.
Nain (2004) shows how competition in the product market is. Reduce representative conflicts
between foreign managers and shareholders Stock market derivatives. Documenting the Increase
in currency derivatives goodwill when using such derivatives is common among competitors.
Bertram et al. (2011) Use the same method for comparison Q ratio of hedger and non-hedger.
Because we are an essential subset in our test, we set up two separate tests to reach a firm
conclusion. We define two treatments based on our hypothesis: the essential IR effect. Impact of
Goodwill Derivatives and Investor Relations Mandatory Service Life Derivatives related to
investors' evaluation of such derivatives. Force match Hedging interest rate derivatives with non-
users to test initial processing. Compare the Q ratio. Test in parallel with the latter by combining
compulsory insurance and voluntary insurance.
Jalilifar (2007) selected 40 research papers published in national and international journals and
analyzed them to combine them with an existing classification of hedge transactions. He tried to
find the answer in English Iran R.A. Author's context and frequency in the humanities and
natural sciences hedge. The results showed the difference in using safeguards in the article
Various rhetorical sections. However, the difference was not statistical Essential. Also, the
differences that existed showed the opinions of researchers. Tends to look objective, assert and
discover the consequences of your study.
Buckley, 1997 Companies that do business with multiple companies Currencies that are likely to
be exposed to currency risk, are Their payments, investments or borrowings are denominated in
foreign currencies, and Small fluctuations in exchange rates have a negative effect The value or
budget of a company and the cost of its business A huge amount of capital that is not effectively
managed. Failure Business failures can, in some cases, cause significant losses to the company.
The financial period and leads to some financial distress.
22

(Lumby & Jones, 2003, p.616) This issue usually occurs when a multinational company
translates consolidated financial statements. Financial statements of overseas subsidiaries in
parent company report currency. In this sense, translation exposure has no real effect. Based on
the company's current or future cash flow, it does not lead to value property changes. However,
the asset appears to lose value during conversion In pounds, or if there is a prize, it is considered
worthless in pounds Annual financial statements.
Hagelin et al. (2004) Discover evidence of hedging in Swedish companies' survey. Activities
increase corporate value. Writers Established a company that uses currency derivatives. To be
negotiated premium compared to those who do not use them. They also showed it If management
has an option plan for a company's stock, they often use it as a hedging instrument to protect
compensation, not shareholder compensation. With this, in this case, hedging has a negative
relationship with goodwill. Also, based on the sample Among Swedish companies,
Pramborg (2004) discovered the positive impact of hedging. Goodwill, and when a company
uses it to hedge transaction risk, the impact is minor when used to hedge translation risk. Jensen
(1986) found that companies with excess cash flow investing in projects with a negative present
value. Current relationship Defined as a variable, the ratio of current assets to current liabilities
Used to manage a company's liquidity.
Stultz (1996) Something related to underinvestment. Froot, Scharfstein, and Stein (1993) have
shown that hedging can be useful. Reduce the underinvestment problem and increase the
company's value Generate additional cash flow with low cash flow A company that raises
external capital. A hedge is Expected tax obligations of companies exposed to convex tax
functions Progressive taxation, low-income effective tax Is low, but the higher the income, the
higher the tax rate (with Graham) Smith, 1995) (Mayers and Smith, 1982), (Smith and Stultz,
1985). A positive relationship, consistency between Hedge and leverage The theory is that
hedging can reduce the cost of financial distress.
Dolda (1995) and Haushalter (2000). Graham and Rogers show that companies are hedging to
increase debt. It's efficient, but the savings you'd expect from tax bumps aren't relevant. Hedging
alleviates the underinvestment problem as a hedge Companies seem to have more growth
opportunities.
Nace et al. (1993) and Ge'czy et al. (1997). While hedging derivatives Effective and essential
risk management strategy, The substance remains mixed (Seok et al., 2020).
Bhagawan and Lukase (2017) reported that companies with high currency risk use more
derivatives positions for hedging purposes. Guay and Kothari (2003) used derivatives, which has
virtually no positive impact on their value. Potential premium Hedging instruments have a lower
stock value than cash flow. For this reason, they point out that the effects of using derivatives are
23

fake and other forms. Risk management leads to small changes in insurance premiums.
Similarly, Samples of US oil and gas companies, Jin and Jorion (2006), Showed no difference in
market value between companies that used hedges Derivatives and non-derivatives.
In addition, Kim etc. (2006). As reported by Allayannis and Weston (2001), the positive effects
of using derivatives on goodwill are suspicious because of the following issues: A change in risk
exposure of the entire sample and endogeneity between companies value and protection. Another
empirical study based on U.S airlines Indicates that the premium generated from the use of
derivatives can be the cause to resolve underinvestment (Carter et al. 2006). However, the use of
derivatives is not the only way to solve the problem of underinvestment.
Froot et al. (1993) If the company makes a substantial investment, suggest choosing
underinvestment necessary. They further claim that underinvestment occurs when there is
internal cash, and the flow is low, and the external cost of capital includes the high cost of own
weight. Therefore, there is no consensus on using financial derivatives for hedging. It solves this
problem of lack of investment.
On the other hand, the use of derivatives Companies are not the only way to deal with the
problem of underinvestment. for example, Cash and cash equivalents can be a more direct way
for businesses to deal with underinvestment. With derivatives, Performance models (3) and (4)
were developed, and three variables were used. Adopted as a measure of performance following
previous surveys (Bartram et al. 2011; Jin and Jorion 2006), Tobin's Q is used for the following
purposes: Eat the company's market value in the stock market and the agent of the company
Model (3) performance. By measuring the market value created by the book Value, Tobin's Q
helps generate a comparable market value between sample forms Relax economies of scale.
According to a previous study (Choi et al. 2013; happiness et al. 2011), model (4) uses return on
assets (ROA) and return on equity (ROE) As an indicator of performance introduced in this
survey.
24

Chapter 4: Research Methodology
4.1 Sample Selection:
The selection study involves a sample date from the non-financial firms from the different
NBFCs. These firms are from India and have been trading derivatives from 2011 to 2020. With
the help of annual reports of the Balance sheet by the standard reporting of the MFRS 7, the
study was carried.
The financial reports were downloaded from India's website in electronic format. The
derivative's positions were scanned with the help of the following keywords mentioned in the
annual reports risk management, foreign exchange forward, forward contract, derivatives.
4.2 Dependent variable:
the market value of firms was made more difficult by Tobin's "A". Researchers used the
estimated q formula evolved by Chung and Pruitt (1994), in which the estimated q was
calculated by taking the firm's market value plus preferred shares and debt and dividing it by the
value of total assets; where the deficit was the value of the firm's quick obligations minus quick
assets plus book value of the firm "are a long-term obligation.
Tobin's Q responds as a surrogate measure for the variable, which is the dependent variable for
the firm's market value and is frequently used for assessing the firm's value. Tobin's Q equals the
25

total market capitalization of common stock plus preferred stock and total debt, divided by the
total asset.
Q= Market Capitalisation+ Preferred Stocks+Total Debt
Total asset
Seoketal (2020) claimed in his research that Tobin's Q is frequently utilized in accounting,
economics, and finance literature for measuring firm value. Many researchers use the above-
shown formula, and they felt that Tobin's Q reflected past performance and future development
aspirations. With the help of Tobin's Q, one of the useful gauges for analyzing business
performance from a long-term market perspective.
4.3 Control Variables:
To describe the firm's value, five control variables are included:
1. Financial market access:
If firms abandon projects because they lack the necessary capital, their firm value
remains high because only projects with a positive net present value (NPV) are pursued.
According to Lau (2016), Allayannis and Weston (2001), and Magee (2013), dividend-
paying companies are less likely to suffer capital limitations and can lower payouts to
raise investment. According to Law (2016) and Seok et al. (2020), the proxy for financial
market access is a firm that pays a dividend in the current year equals "1" and "0"
otherwise.
2. Firm's risk:
Previous research has found that Korean enterprises that use a lot of foreign currency
futures had reduced firm risk and higher firm value (Bae et al., 2017). Choi et al. (2013)
discovered that enterprises involved in derivatives have poorer profitability.
3. Size of the firm:
Firm size has been demonstrated to have an impact on firm value. Previous research has
found that business size has a significant positive link with hedging decisions and thus
enhances firm value (Allayannis et al., 2011; Lau, 2016; Magee, 2013). Allayannis and
Weston (2001) and Ayturk et al. (2016), on the other hand, discovered that company size
is adversely connected to firm value. The natural logarithm of total assets is used as a
proxy for firm size, and derivatives firms have lesser profitability.
4. Increased investment:
Firms typically have a significant investment and rely on future investment possibilities
to grow, and growth eventually impacts business value. Like Allayannis and Weston
26

(2001) and Seok et al. (2020), this study uses the capital expenditure to sales ratio to
measure investment growth.
5. Use of leverage:
The capital structure of the firm influences firm value. As a result, long-term debt split by
total shareholder equity is used in this study to control for capital structure. This is similar
to the work of Allayannis et al. (2011), Ayturk et al. (2016), and Seok et al. (2016).
(2020).
4.4 Propensity Score Matching Methodology:
Previous findings in the literature, which we replicate in our sample, indicate significant
variations in the characteristics of organizations that employ derivatives and those that do not.
When evaluating the effect of derivatives on a firm, these differences can cause a sampling error.
They should be considered when estimating the impact of derivatives on risk and market prices.
Ideally, the "treatment" effect would be estimated by watching the same company under a similar
market situation, with and without derivatives in place.
Because this is not feasible, the first method employed seeks to design an "identical" company to
the owner. The "identical" firm varies only in its decision not to include derivatives. Instead of
matching several specific firm-specific factors or variables, we utilize an approach that matches
the propensity score (the estimated likelihood that a firm will use derivatives). Rosenbaum and
Rubin (1983) demonstrate that matching covariates and matching on confirmatory factors
resulted in the same covariate distribution in the treated and untreated groups. One advantage of
propensity score matching is that it reduces the "curse of dimensionality when attempting to
match many features.
Bias in Selection:
If uncontrolled or undisclosed variables influence the decision to utilize derivatives, a bias in the
estimated effect may remain. The propensity score matching technique has the advantage of
allowing for a scenario analysis on this sample bias. Rosenbaum (2002) indicates that it is
possible to set an upper bound on the influence of any missing variable on the hedging choice to
overturn the inferences formed. We estimate this constraint and compare it to the effect that any
unseen bias must have about influencing the firms' observable features to overturn the original
inference. While we cannot rule out the influence of a hidden trait, we can establish a benchmark
for how substantial the effect would have to be compared to well-known company characteristics
to modify the conclusions derived from the research.
4.5 Hypothesis Conclusion:
The main purpose of studying is to address whether derivatives affect firm market value. Given
below are the hypothesis and corresponding relation among hedging derivatives and the value of
a firm.
27

H1: There is a significant positive relationship between hedging derivatives increasing a firm's
value.
Chapter 5: Data Analysis & Interpretation
This research started with Graph 1 on the correlation among firm value and derivatives, as well
as ownership concentration with covariate, which is written in a column data format as follows.
Qvn = β0+β1 Qvn−1 +β1 DERvn+β2 MOvn+β3 ACCESvn+β4 RISKvn+β5 SIZEvn+β6
GROWTHvn+β7 LEVvn+ηv+εvn
Where Q represents firm value, which is measured by Tobin's Q for firm v in time period N. To
account for value of firm persistence, the tends to lag value of Tobin's Q is also used as an
explanatory variable.
The independent variables are derivatives DERvn and MOvn ( ownership concentration). The
dependent variable in the study which are included are ACCESvt which refer to the access to
financial market, RISKvn is a risk associated with firm, SIZEvn is size of a
firm, GROWTHvn as growth of investment and LEVvn stands for leverage, while ηv is a firm’s
specific term that is unobserved and εvn is an error term.
Table 1
Overall Summary of Description research
28

Variables Observations Mean S.D
Tobin’s Q 1195 1.1908 1.3855
Derivatives 960 53.1509 197.6473
ROA 1175 0.0638 0.10144
ROE 1175 0.015 0.2320
OC 1120 8.1496 14.4080
ACCESS 1250 0.7638 0.4608
Risk 1185 0.3304 0.1739
Size 1190 13.910 2.0369
Growth 1185 0.1092 0.3893
LEV 995 0.3841 0.7558
The above table presents the descriptive statistics of the variables that are used in the data
analysis. The sample comprises 300 firms from the Non-Banking financial companies in India.
First, the mean for Tobin's Q is 1.1908 with standard deviation (SD) of 1.3855 which reveals
that the firms are in a profitable position, where the derivatives mean is 53.1509 and standard
deviation is 197.6473 and ownership concentration mean is 8.1496%, SD is 14.4080 which
depicts that a lower ownership concentration in the firms which are taken as a sample. The
access to financial market’s mean and SD of access are 0.7638% and 0.4608%, respectively. The
firm risk mean depicts 33.04% with SD of 17.39%, denoting lower risk for the firms. Then, the
mean revealed for firm size is 13.910 with SD of 2.0369.
Table 2
Non-Banking Financial Companies Statistics
Variables Observations Mean S.D
Tobin’s Q 1195 1.0491 0.6588
Derivatives 960 26.9592 37.4938
OC 1120 6.3435 14.5638
Access 1250 0.7611 0.4630
Risk 1185 0.3082 0.1492
Size 1190 14.6426 2.9170
Growth 1185 0.2327 0.6578
Lev 995 0.8912 1.2295
The above table represents the use of derivatives by NBFC’s during the study period with mean
26.952 and standard deviations 0.374938
Hypothesis testing:
H1. There is a significant positive relationship between the hedging derivatives to increase the
value of a firm. The result from table 1 and 2 provide proof that derivatives and ownership
concentration influence the value of a firm. The findings in this research study prove that this
29

technique is used rationally when hedging derivatives, and it helps increase the firm's value. The
positive relation between a firm's value and hedging is due to many reasons. Below listed are the
reasons,
i. Use of derivatives to hedge exposure to risk by the firm (Lau 2016)
ii. In a view to retaining the value of firm firms that takes more risk, use derivatives for
hedging risk.
Thus, the above findings confirm that there is an existence of a positive relationship among
hedging derivatives and firm's value.
Chapter 6: Findings and Conclusions
6.1 Findings:
Current study gives an evidence for the theory of hedging that is anticipated and have positive
influence on derivatives and a value of firm. However, based on the pessimist interaction among
derivatives and management ownership on a company value , the analysis implies that managers
hedged less when they owned more shares .As a result, managerial hedging decisions in Indian
NBFC's do not support the managerial aversion theory .
6.2 Conclusion:
The present research concludes the hypothesis and questions which shows how hedging
strategies used by derivatives have an impact the market value. A sample of non-banking
financial companies listed in the Indian Stock Market FTSE from 2011-2020. Many unowned
researchers have studied these questions but remain unanswered; hence, this study enhances the
current studies pertinency.
This study focuses on hedging derivatives for two different corporate risks.
i. Interest rate risk
ii. Foreign exchange risk
30

The second part focuses on the types of derivatives used by explaining them in detail.
This dissertation will help improve firm’s strategy of hedging with the help of the results derived
by the interaction between contracts and risks.
It also clarifies the most effective derivatives in hedging a specific risk. There are some
limitations in this research, such as the size of the sample being small. With the augmentation in
derivatives, it is very significant to have more research in this field.
This research gives a positive and supportive relationship between the hedging derivatives as
well as the value of a firm. This can be concluded that hedging is the best technique to increase
the value of a firm if this technique is used.
References
Allayannis, G., Weston, J., 2001. The use of Foreign Currency Derivatives and Firm Market
Value. Review of Financial Studies, pg 14, 243-276.
Ashutosh Vashishtha and Satish Kumar (2010).Development of Financial Derivatives Market
in India- A Case Study. International research journal of finance and economics ISSN 1450-
2887 Issue 37.
Ali Marami, Michael Dubois (2013), Interest rate Derivatives and firm value: Evidence from
Mandatory versus voluntary Hedging, Swiss Finance Institute, Switzerland.
Buckley, A. (2004). "Multinational Finance". 5th ed. FT Prentice Hall, Financial Times.
Beatty, A., Petacchi, R., Zhang, H., 2011. Hedge commitments and agency costs of debt:
evidence from interest rate protection covenants and accounting conservatism. Review of
Accounting Studies pg 17, 1-39.
Bartram, S., Brown, G. and Conrad, J., 2007. The Effects of Derivatives on Firm Risk and
Value. Working Paper, Lancaster University.
31

Borokhovinch, K.A; K.R. Brunarksi; C.E. Crutchley; and B.J. Simkins. "Board Composition and
Corporate Use of Interest Rate Derivatives". Journal of Financial Research, 27 (2004), pg
199-216.
Daigler, R. T. ( 1994). "Financial futures &Options markets concepts and strategies". Harper
Collins College Publishers.
Dhanani, A.; S.Fifield; C. Helliar; and L. Stevenson. "Why U.K. Companies Hedge Interest
Rate Risk". Studies in Economics and Finance,24 (2007), pg 79-90
Froot, K.A, Scharfstein, D.S and Stein, J.C (1993), Risk management: Coordinating corporate
investment and financing policies, Journal of Finance pg 48, pg1629-1658
Gay, G.D. and Nam, J. (1998), the underinvestment problem and corporate derivatives use,
financial management pg 27, pg 53-69
Hagelin, N. (2004). Hedging foreign exchange exposure: risk reduction from the transaction
and translation hedging. Journal of International Financial Management and Accounting.
Vol. 15 (1): pg 1-20
Hull, J. (2011). "Options, Futures, And other derivatives". 8th edition Pearson.
Hany Ahmed, Alcino Azevedo , Yilmaz Guney .The Effect of Hedging on Firm Value and
Performance(2014): Evidence from the Non-financial UK Firms.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers.
American Economic Review, vol.76: 323-329
Jalilafar, A (2007a) All the way through the hedges. A corpus analysis of hedges in research
articles, JAL, pg 23, pg 39-63.
Jin, Y., Jorion, P., 2006. Firm Value and Hedging: Evidence From U.S. Oil and Gas Producers.
Journal of Finance, 61 (2), 893-919.
Lumby, S.& Jones, C. (2003). "Corporate Finance: theory and practice". 7th ed. Thomson
Mariana Vila Nova, António Cerqueira, Elísio Brandão . Hedging With Derivatives and Firm
Value: Evidence for the non-financial firms listed on the London Stock Exchange (2015).
Nain, A.,2004., The strategic motives for corporate risk management. Unpublished working
paper. The University of Michigan.
32

Nance (1993) On the determinants of corporate hedging, Journal of finance pg 48, pg 267-
284.
Pramborg, B.(2004). Derivatives Hedging, Geographical Diversification, and Firm Market
Value. Journal of Multinational Financial Management, vol.14: pg 117-133
Smith, C.W, and Stulz. R.M. (1985), the determinants of forms hedging policies, Journal of
financial and quantitative analysis pg 20, pg 391-405.
Supavanji J and Strauss, J. (2010) corporate derivative use and the compensation of CEO
compensation, Global finance journal pg 21, pg 170-185.
Spyridon Kapitsinas. The Impact of Derivatives Usage on Firm Value: Evidence from Greece
(2008).
Sonki.M, Gregory W. Brown, Jennifer Conrad (2011). The effects of Derivatives on firm risk
and value, Journal of Financial and Quantitative analysis Vol 46, No.4, August 2011, PP 967-
999.
Tufano. P. (1996). Who manages risk? An empirical examination of risk management
practices in the gold mining industry, Journal of finance pg 51, pg 1097 -1137.
Yusuf Ayturk (2016) corporate derivatives use and firm value. Evidence from Turkey, Borsa
Istanbul Review Volume 16, Issue 2, June 2016 pg 108-120.
Chapter 4: Research Methodology
4.1 Sample Selection:
The selection study involves a sample size taken from the non-banking financial companies .
These firms are from India and have been trading derivatives from 2011 to 2020. With the help
33

of annual reports of the Balance sheet by the standard reporting of the MFRS 7, the study was
carried.
The finance reports were taken from India's website in the form of electronic format. The
derivative's positions were scanned with the help of the following mentioned keywords in the
annual reports that includes management of risk, foreign exchange forward, forward contract,
derivatives.
4.2 Dependent variable:
the market value of firms was made more difficult by Tobin's "A". Researchers used the
estimated q formula evolved by Chung and Pruitt (1994), in which the estimated q was
calculated by taking the firm's market value plus preferred shares and debt and dividing it by the
value of total assets; where the deficit was the value of the firm's quick obligations minus quick
assets plus book value of the firm "are a long-term obligation.
Tobin's Q responds by way of a substitute measure used by variable, which is the dependent
variable for the firm's market value and is frequently used for assessing the firm's value. Tobin's
Q equals the total market capitalization of common stock and adding preferred stock and total
debt, divided by the entire asset.
Q= Market Capitalisation+ Preferred Stocks+Total Debt
Total asset
Seoketal (2020) claimed in his research that Tobin's Q is frequently utilized in accounting,
literature for measuring firm value. Many researchers use the above-shown formula, and they felt
that Tobin's Q reflected past performance and future development aspirations. With the help of
Tobin's Q, one of the useful gauges for analyzing business performance from a long-term market
perspective.
4.3 Control Variables:
To describe the firm's value, five control variables are included:
6. Financial market access:
If companies abandon projects due to the lack of the necessary capital, the firm’s value
remains high due to projects with a positive net present value (NPV) as they are pursued.
According to Lau (2016), Allayannis and Weston (2001), and Magee (2013), dividend-
paying companies are not more likely to suffer limitations of capital and may reduce
payouts to raise speculation. According to Law (2016) and Seok et al. (2020), the proxy
for financial market access is a firm that pays a dividend in the current year equals "1"
and "0" otherwise.
34

7. Firm's risk:
Previous research has found that Korean enterprises that use a lot of foreign currency
futures had reduced firm risk and higher value of a firm (Bae et al., 2017). Choi et al.
(2013) discovered, enterprises involved in derivatives have poorer profitability.
8. Size of the firm:
Firm size has been demonstrated to have an impact on firm value. Previous research has
found that business size has a significant positive link with hedging decisions and thus
enhances firm value (Allayannis et al., 2011; Lau, 2016; Magee, 2013). Allayannis and
Weston (2001) and Ayturk et al. (2016), on the other hand, discovered that company size
is adversely connected to firm value. The natural logarithm of total assets is used as a
proxy for firm size, and derivatives firms have lesser profitability.
9. Increased investment:
Firms typically have a significant investment and rely on future investment possibilities
to grow, and growth eventually impacts business value. Like Allayannis and Weston
(2001) and Seok et al. (2020), this study uses the capital expenditure to sales ratio to
measure investment growth.
10. Use of leverage:
The capital structure of the firm influences firm value. As a result, long-term debt split by
total shareholder equity is used in this study to control for capital structure. This is similar
to the work of Allayannis et al. (2011), Ayturk et al. (2016), and Seok et al. (2016).
(2020).
4.4 Propensity Score Matching Methodology:
Past findings in the literature review, which replicate in the sample of our study, indicate
important variations in the features of organizations that employ derivatives and those that do
not. When evaluating the effect of derivatives on a firm, these differences can cause a sampling
error. They should be considered when estimating the impact of derivatives on risk and market
prices. Ideally, the "treatment" effect would be estimated by watching the same company under a
similar market situation, with and without derivatives in place.
Because this is not feasible, the first method employed seeks to design an "identical" company to
the owner. The "identical" firm varies only in its decision not to include derivatives. Instead of
matching several specific firm-specific factors or variables, we utilize an approach that matches
the propensity score (the estimated likelihood that a firm will use derivatives). Rosenbaum and
Rubin (1983) demonstrate that matching covariates and matching on confirmatory factors
resulted in the same covariate distribution in the treated and untreated groups. One advantage of
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propensity score matching is that it reduces the "curse of dimensionality when attempting to
match many features.
Bias in Selection:
If uncontrolled or undisclosed variables influence the decision to utilize derivatives, a bias in the
estimated effect may remain. The propensity score matching technique has the advantage of
allowing for a scenario analysis on this sample bias. Rosenbaum (2002) indicates that it is
possible to set an upper bound on the influence of any missing variable on the hedging choice to
overturn the inferences formed. We estimate this constraint and compare it to the effect that any
unseen bias must have about influencing the firms' observable features to overturn the original
inference. While we cannot rule out the influence of a hidden trait, we can establish a benchmark
for how substantial the effect would have to be compared to well-known company characteristics
to modify the conclusions derived from the research.
4.5 Hypothesis Conclusion:
The main purpose of studying is to address whether derivatives affect firm market value. Given
below are the hypothesis and corresponding relation among hedging derivatives and the value of
a firm.
H1: There is a significant positive relationship between hedging derivatives increasing a firm's
value.
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Chapter 5: Data Analysis & Interpretation
This research started with analysis of data with the help of the correlation among value of firm
and financial derivatives, as well as control of ownership through covariate, which is inscribed in
a data format as given below
Qvn = β0+β1 Qvn−1 +β1 DERvn+β2 MOvn+β3 ACCESvn+β4 RISKvn+β5 SIZEvn+β6
GROWTHvn+β7 LEVvn+ηv+εvn
Where Q represents firm value, which is calculated by Tobin's Q for company v in time Which
account for value of firm persistence, the tends to lag assessment of Tobin's Q is also used as an
explanatory variable.
The self-regulating variables are financial derivatives DERvn & MOvn ( ownership
concentration). The dependent variable in the study which are included are ACCESvt which refer
to the financial market access , RISKvn depicts market risk associated with firm, SIZEvn is size
of a firm, GROWTHvn as growth of investment and LEVvn stands for leverage, while ηv is a
firm’s specific term that is unobserved and εvn is an error term.
Table 1
Overall Summary of Description research
Variables Observations Mean S.D
Tobin’s Q 1195 1.1908 1.3855
Derivatives 960 53.1509 197.6473
ROA 1175 0.0638 0.10144
ROE 1175 0.015 0.2320
OC 1120 8.1496 14.4080
ACCESS 1250 0.7638 0.4608
Risk 1185 0.3304 0.1739
Size 1190 13.910 2.0369
Growth 1185 0.1092 0.3893
LEV 995 0.3841 0.7558
The above table depicts the expressive figures of the variables that are used in the analysis of
data. The sample encompasses of 300 firms taken from the Non-Banking financial categories in
India. First, the mean for Tobin's Q is 1.1908 with SD of 1.3855 which reveals that the
companies are in a profitable position, where derivatives mean is 53.1509 and standard
deviation is 197.6473 and ownership concentration mean is 8.1496%, Standard deviation is
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14.4080 which depicts that a lower ownership concentration in the firms which are taken as a
sample. The access to financial market’s mean and Standard deviation of access are 0.7638% and
0.4608%, respectively. The firm risk mean depicts 33.04% with Standard deviation of 17.39%,
indicating lower risk for the companies. Then, the mean for firm size revealed is 13.910 and
Standard deviation of 2.0369.
Table 2
Non-Banking Financial Companies Statistics
Variables Observations Mean S.D
Tobin’s Q 1195 1.0491 0.6588
Derivatives 960 26.9592 37.4938
OC 1120 6.3435 14.5638
Access 1250 0.7611 0.4630
Risk 1185 0.3082 0.1492
Size 1190 14.6426 2.9170
Growth 1185 0.2327 0.6578
Lev 995 0.8912 1.2295
The above table represents the use of derivatives by NBFC’s during the study period with mean
26.952 and standard deviations 0.374938
Hypothesis testing:
H1. A substantial positive relationship exists between the derivatives hedging to increase the
value of a firm. The result from table 1 and 2 provide proof that derivatives and ownership
concentration influence the firm’s value. The findings in this research prove that this technique is
used rationally when hedging derivatives, and it helps increase the firm's value. The positive
relation between a firm's value and hedging is due to many reasons. Below listed are the reasons,
iii. Use of derivatives to hedge exposure to risk by the firm (Lau 2016)
iv. In a view to retaining the value of firm firms that takes more risk, use derivatives for
hedging risk.
Thus, the above findings confirm that there is an existence of a positive relationship among
hedging derivatives and value of a firm.
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Chapter 6: Findings and Conclusions
6.1 Findings:
Current study gives an evidence for the theory of hedging that is anticipated and has positive
influence on derivatives and a value of firm. However, based on the pessimist interaction among
derivatives and management ownership on a company value , the analysis implies that managers
hedged less when they owned more shares .As a result, managerial hedging decisions in Indian
NBFC's do not support the managerial aversion theory .
6.2 Conclusion:
The present research concludes the hypothesis and questions which shows how hedging
strategies used by derivatives have an impact the market value. A sample of non-banking
financial companies listed in the Indian Stock Market FTSE from 2011-2020. Many unowned
researchers have studied these questions but remain unanswered; hence, this study enhances the
current studies pertinence.
This study focuses on hedging derivatives for two different corporate risks.
iii. Interest rate risk
iv. Foreign exchange risk
The second part focuses on the types of derivatives used by explaining them in detail.
This dissertation will help improve firm’s strategy of hedging with the help of the results derived
by the interaction between contracts and risks.
It also clarifies the most effective derivatives in hedging a specific risk. There are some
limitations in this research, such as the size of the sample being small. With the augmentation in
derivatives, it is very significant to have more research in this field.
This research gives a positive and supportive relationship between the hedging derivatives as
well as the value of a firm. This can be concluded that hedging is the best technique to increase
the value of a firm if this technique is used.
39

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