FOREIGN EXCHANGE EXPOSURE & USE OF RISK MANAGEMENT TOOLS: EVIDENCE FROM LISTED COMPANIES IN SRI LANKA

Abstract

In recent years, researchers pay significant attention to the importance of risk management. The high volatility of exchange rates is a fact to every company that brings uncertainty to every bottom line of international businesses. Throughout recent years, international trade in Sri Lanka has been increased rapidly. According to that, companies face a high risk when rising foreign exchange exposure. Therefore, foreign exchange exposure has had a profound effect on the firm’s performance in Sri Lanka. Hence, companies’ trend to manage foreign exchange risk and this study used derivatives as risk management tools. Therefore, this study focuses on the effect of foreign exchange exposure on firm’s performance of listed companies in Sri Lanka. In addition, this study was conducted under the quantitative and deductive approach through secondary data and the sample of the study was 30 listed companies from 245 listed companies that used derivatives in Sri Lanka. The data were collected from annual reports of listed companies from 2012/13 to 2018/19. The three-stage least squares (3SLS) technique was used to test the structural relationship between these foreign exchange exposure and firm performance. The findings elaborated that existed a significantly strong and positive effect on foreign Exchange Exposure and profitability (ROA, ROE). Firm size has a negative significant effect on ROA; Leverage has a positive significant effect on ROA. In addition, Derivative usage and Foreign Sales have no significant impact on firm performance. The study concluded that foreign exchange exposure significantly effects firm performance. However, foreign exchange exposure has not indirect effect on firm performance through derivative usage.