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Economics and Finance in Mauritius pp 277–308Cite as

Palgrave Macmillan

What Factors Drive Hedging Among Mauritian Firms?

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Abstract

This chapter fills a vital gap when it comes to assessing the drivers behind hedging in Mauritius. It is widely acknowledged by both practitioners and academicians that knowledge about derivatives’ use constitutes a major hurdle in their use. Prior empirical evidence on hedging is chiefly focused on developed countries with little being understood about the situation in developing countries. Using data for the period 2005–06, findings clearly show that managers’ incentives to hedge, the tax convexity motive to hedge along with financial and operational explanations underlying hedging, are not applicable to the Mauritian context. Important drivers for hedging are found to be a composition of the size and age of firms, buttressing the notion that high fixed costs and knowledge about derivatives act as the main propelling forces for a derivatives framework. These findings suggest that larger firms are the ones most susceptible to use derivatives. Consequently, smaller firms, though subject to currency risk, are less susceptible to endorse sound risk management programmes. The government is therefore advised to establish a derivatives house whereby smaller firms can have the possibility to hedge as per their size so that currency risk impacts are well contained in the economy.

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Notes

  1. 1.

    Rights issues do not constitute a common practice on the Stock Exchange of Mauritius.

  2. 2.

    This could also lead to lower risk, it all depends on the movements in the two currencies vis-à-vis the rupee.

  3. 3.

    Such a depreciating rupee is highly appreciated among exporters as it their revenue receipts denominated in rupees.

  4. 4.

    The solution is to analyse whether they report their asset and liabilities in foreign currencies to make them eligible for the analysis.

  5. 5.

    But this holds only for a small number of companies.

  6. 6.

    Technically speaking, the sample should be biased towards importers based on the depreciating rupee; because many exporters are also importers, however, they were incorporated into the analysis.

  7. 7.

    Both hedgers and speculators account for the main actors in the derivatives market.

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Authors and Affiliations

  1. University of Mauritius, Moka, Mauritius

    Indranarain Ramlall

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Ramlall, I. (2017). What Factors Drive Hedging Among Mauritian Firms?. In: Economics and Finance in Mauritius. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-39435-0_13

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  • DOI: https://doi.org/10.1007/978-3-319-39435-0_13

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  • Print ISBN: 978-3-319-39434-3

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