[The Motives for Corporate Hedging among Australian Multinationals]

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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

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I, [type your full first names and surname here], declare that the contents of this thesis represent my own unaided work, and that the thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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Abstract

The purpose of this thesis is to investigate the effects of the use of financial and operational hedging on foreign exchange rate exposure among Australian corporations. Since the flotation of the Australian dollar at the end of 1983, Australian firms have become increasingly exposed to foreign exchange rate risk. To eliminate this risk, Australian firms have undertaken substantial corporate hedging programs, which are both financial and operational in nature. It is notable that there has been an increase in financial hedging techniques such as derivatives and foreign-currency denominated debt, and operational hedging such as diversifying and spreading subsidiaries across foreign countries. Despite the substantial involvement in corporate hedging strategies, there is a paucity of Australian research studies examining the relationship between the use of financial and operational hedging by firms and their levels of foreign exchange rate exposure. A two-stage market model was used to investigate the main research problem using a sample of 80 Australian corporations. The first-stage model - Jorion's (1991, 363) model - was adopted, to test the first hypothesis of whether there exists a relationship between stock returns and changes in exchange rates, by estimating the exposure coefficients to foreign currency risk during the period from 2006 to 2010. Next, the second-stage model utilised cross-sectional regression models to examine the effects of the use of financial hedging, separately and/or in combination with, operational hedging on foreign exchange risk exposure. This second-stage model was estimated for the 2004 financial year data to test seven hypotheses. These seven hypotheses were related to whether the use of financial separately, or in combination with, operational hedging effectively reduced exposure. Therefore, eight main research hypotheses were tested in the study. Findings of the study were that there is only weak evidence to support the hypothesis that stock returns were sensitive to changes in value of the Australian dollar. It was found that the use of foreign currency derivatives was significantly related to exposure reduction. The use of foreign debt was also found to be significantly related to exposure reduction, indicating that foreign debt is used for hedging purposes. Furthermore, the combined use of these two financial hedging strategies was found to be significantly associated with the exposure reduction. By the same token, these two financial hedging strategies were found to be substitutive to each other in reducing exposure. Operational hedging proxies were also significantly associated with the exposure reduction. This latter finding indicates that, for the purposes of hedging, firms diversify and disperse foreign operations and subsidiaries across ...