Why Non-Financial Firms in UK Hedge?

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ACKNOWLEDGEMENT

I would initially consider to convey my whole hearted appreciation to the person who had supervised me throughout this study. Next, I would also take this opportunity to give thanks to all those people, who had thouroughly supported me, throughout the passage of conducting this study, which include all my colleagues, friends, along with my family members. Conducting this study, would not have been possible without the kind of support all these individuals have provided me with.

DECLARATION

I [type your full first names & surname here], declare that his study and the entire material that has been presented in this study is an individual effort, without acquiring any kind of aid. Furhtermore, I also declare that its my personal effort and that this study has not been published before. Moreover, it contains elements of my own thought and opinion on this particular area of study and in no way, represents any sort of idea of my University.

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Abstract

This paper investigates the reasons why non-financial firms in UK hedge. It looks at the various hedging terminologies and derivatives of hedging strategies that can be used by a non financial firm. Moreover, the paper studies a sample of 311 non financial UK firms and studies how and why these firms hedge and in which derivatives of hedging instruments they use to hedge their risk, according to the information given in their annual reports for the years 2010 and 2011. The paper answers several questions regarding the hedging behavior of non financial firms in UK and interprets that information in tabular form according to each of the question.

Table of Contents

ACKNOWLEDGEMENTii

DECLARATIONiii

Abstractiv

CHAPTER 1: INTRODUCTION1

1.1 Outline of the Study1

1.2 Background of the Study2

1.3 Problem Statement3

1.4 Purpose of the Study4

1.5 Nature of the Study5

1.6 Research Questions6

1.7 Assumption6

1.8 Scope & Delimitations7

1.9 Limitations8

1.10 Significance of the Study9

1.11 Reliability & Validity10

1.12 Ethical Considerations11

CHAPTER 2: LITERATURE REVIEW13

2.1 Future Markets & Hedging13

2.1.1 Rolling Stack Hedging13

2.1.2 Cash Flow Effects14

2.2 Hedging Exchange Rate Risk with Derivatives15

2.3 The Practices of Foreign Exchange Hedging17

2.4 Trends of How Corporations Approach Hedging20

2.5 Hedging Using Credit Derivatives22

2.6 Derivatives & Tax Avoidance25

2.7 Corporate Risk Management27

2.8 Cost of Hedging & Firm Size30

2.9 Corporate Exchange Risk Management32

2.10 Corporate Hedging & Inventory Management33

CHAPTER 3: METHODOLOGY35

3.1 Research Design35

3.2 Secondary Data35

3.3 Literature Search36

3.4 Sample Size37

3.5 Identification of Exchange Rate Exposure37

3.6 Data Research Method37

CHAPTER 4: ANALYSIS39

4.1 Disclosure from Annual Reports39

4.2 The Use of Derivatives & Foreign Currency Debt for Hedging Purpose40

4.2.1 Regression Analysis44

4.2.2 T Tests: Paired Two Sample for Means50

CHAPTER 5: CONCLUSION55

5.1 Implications58

5.2 Recommendations for Future Studies59

5.3 Concluding Remarks60

References63

CHAPTER 1: INTRODUCTION

1.1 Outline of the Study

This study describes the work performed to further understand why non financial firms in UK hedge. Although this work focuses mainly on the development of detailed research of the hedging activities of the non financial firms, however a wide array of literature have been examined as in order to understand the concept of corporate hedging, derivative used in hedging and corporate risk management as well. More than 300 UK firms have been the target for the ...