Hedging against exporting costs and risks in the South African extractive industry

[摘要] The revolutionisation of international economies and monetary systems has beentaking place since the early 1970s. This occurred due to the diminishing fixedexchange rate systems of, initially, the Gold Standard and subsequently the BrettonWoods System. The collapse of these systems, especially the Bretton WoodsSystem, led to the almost free movement of exchange rates. The lack of restrictionplaced on the movement of currencies created volatile markets; which, in turn, gaverise to an innumerable amount of risks.In Correia, Holman and Jahreskog (2012) it was determined that an astonishing 74%of non-financial firms in South Africa hedge foreign exchange risk (the risk ofcurrency movement). The 10% of firms which did not hedge any risks declared itwas due to the lack of exposure to foreign exchange risks and that the cost ofacquiring a hedging contract, in many cases, exceeded the contract's benefits. Inthe aforementioned study it was also established that the extractive sector of SouthAfrica is one of the industries referring from the use of hedges.The intention of this study is to improve the effectiveness of derivative instrumentsfor companies in the extractive sector of South Africa exporting to the United Statesof America. South Africa is a large exporter and importer of goods, making itextremely important for market participants to determine the movement of theexchange rates. This estimates the amount of risk a company is willing to take andthe amount of hedges they will use to protect themselves against inauspicious andadverse movements in the markets.Therefore, incorporated in this study is the use of risk management tools from thetechnical analysis to predict the exchange rates at which companies should have settheir hedging contracts on specific dates. This analysis could enable companies toperform an internal control that is inexpensive and which reduces risks of foreignexporting.

[发布机构] North-West University