Abstract:
This paper explores the effect of financial instruments for exchange rate hedging on a firm's value in the presence of non-operating profit or loss from foreign exchange transactions. This study uses Tobin's Q ratio as a proxy for firm value and a two-step generalized method of moments (GMM) model to estimate the effect of financial hedging. Our dynamic panel analysis using extensive data on 61 Indian multinational corporations (MNCs) in 2009-2020 shows that financial hedging instruments, such as foreign currency derivatives (FCD) and foreign currency-denominated debt (FDD), enhance firm value by 16.91% and 10.21%, respectively. The results of the robustness test confirm the findings.
