The Determinants of Currency Hedging in Indian IT Firms

Abstract

This paper examines the factors which determine the usage of currency derivatives by Indian IT companies. It is found that a total of 18 large Indian IT firms use currency derivatives. Which have disclosed the currency derivative data in their annual reports; this study uses cross sectional panel data for three years from 2011 to 2013 and applies a multiple regression model. For this purpose, the firm-specific characteristics such as financial distress cost, underinvestment cost, multinationality, firm size, Taxation and Liquidity are regressed against the notional amount of derivatives reported for hedging activities. It is found that Size (Total assets) and Underinvestment (PE ratio) is the major determinant of the currency derivative usage by large Indian IT companies.