The use of derivatives in corporate risk management - A value adding strategy?

Abstract: Part I:This study highlights the role of active risk management of currency risk exposure within large listed non-financial European firms. In the aftermath of the global pandemic and invasion of Ukraine, many firm across the global has experienced challenges in terms of sustaining stable cash flows. Euro-denominated firms was challenged with a weakened euro and highly volatile markets, which increased the importance of corporate risk management and currency risk hedging. The central hypothesis of this study is to examine if the use of currency derivatives has a significant effect on firm value, proxied by Tobin's Q. The study was conducted on 416 European firms, manually identified with currency risk exposure, and grouped into user and non-users of derivative instruments to hedge their currency risk exposure. The study was executed through regression analysis and hypothesis testing. The study also highlights fundamental financial theories in conjunction with the results obtained and challenges the classical objectives of active risk management. The results of the analysis performed, show no significant relationship between the use of currency derivatives and firm value measured by Tobin's Q. Part II:The global economy and highly volatile markets creates the need for international corporation to engage in risk management to withstand financial turbulence. It is thus common that companies turn to financial markets to hedge different market risk factors efficiently through the use of derivative contracts. Hedging activities may be an effective way to hedge e.g., currency or interest rate risk to a certain extent. However, derivatives are rarely free, and are often associated with costs either in terms of premiums or in terms of risk. This paper will foster a critical discussion around the extensive use of derivatives within corporate risk management in non-financial firms. The discussion is anchored in a case study conducted on Porsche and their hedging strategies in 2007, for which highlights the upside potential of using currency derivatives and stock options. The purpose of the discussion is to question hedging strategies centred around derivatives and the appropriateness of said strategies within non-financial firms. The discussion and conclusion of this paper will govern a more qualitative view on corporate risk management, which will complement the finding presented in part I of this thesis.