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The use of Fx derivatives and the cost of capital: Evidence of Brazilian companies

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  • Coutinho, João Ricardo Ribeiro
  • Sheng, Hsia Hua
  • Lora, Mayra Ivanoff
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    Abstract

    Large corporations have been using derivative instruments as a tool to protect their indirect exposure, as FX risks. A sample with 47 non-financial Bovespa Listed Brazilian companies from 2004 and 2010 was used to test the hypothesis that use of derivatives as a risk management policy tool reduces companies' cost of capital. In contrast to other countries, results rejected this hypothesis, showing that in Brazil there is a positive relationship between using these tools and cost of capital. However, a more in-depth analysis based on the TACC model for a Brazilian company, this hypothesis was not rejected after the 2008 crisis.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1566014112000295
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    Bibliographic Info

    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 13 (2012)
    Issue (Month): 4 ()
    Pages: 411-423

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    Handle: RePEc:eee:ememar:v:13:y:2012:i:4:p:411-423

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    Web page: http://www.elsevier.com/locate/inca/620356

    Related research

    Keywords: Derivatives; Cost of capital; WACC; Risk capital; Hedge; Risk management; Non-financial companies (or non-financials in market jargon);

    References

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    1. José Luiz Rossi Júnior, 2008. "Corporate Financial Policies and the Exchange Rate Regime: Evidence from Brazil," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807210957020, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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    11. Mishra, Dev R. & O'Brien, Thomas J., 2005. "Risk and ex ante cost of equity estimates of emerging market firms," Emerging Markets Review, Elsevier, vol. 6(2), pages 107-120, June.
    12. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
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    14. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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