Derivatives Usage in Emerging Markets Following the GFC: Evidence from the GCC Countries

ABSTRACT

In this article, we avail of International Accounting Standards IFRS 7 to investigate the usage and motivation of hedging by firms in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). The results of our panel and cross-sectional data logistic regressions indicate a focus on foreign exchange exposure, interest rates risk, and commodity risk in this region. We find that the use of hedging instruments in this region is also influenced positively by the firm’s size and, to a lesser degree, positively by the firm’s gearing ratio and negatively by its propensity to growth. The level of activity, nevertheless, remains lower than is the case for firms globally.

KEY WORDS:

• derivatives
• emerging markets
• hedging
• risk management

Notes

1. There are several reports on this. For example, Fenn, Post, and Sharpe (1996); Bodnar et al. (1995); Bodnar, Hayt, and Marston (1996); Bodnar, Hayt, and Marston (1998) (United States); Bodnar and Gebhardt (1999) and Fatemi and Glaum (2000) (Germany); Bodnar, De Jong, and Macrae (2003) (Netherlands); Bodnar et al. (2013) (Italy); Mallin, Ow-Yong, and Reynolds (2001) and Judge (2006) (UK); Junior (2013) (Brazil); Alkeback and Hagelin (1999) and Brunzell, Hansson, and Liljeblom (2011) (Scandinavia); and Jalilvand, Switzer, and Tang (2000) (in a survey covering Canada, America, and Europe).

2. There are several reports on this. For example, Mansor, Bhatti, and Ariff (2015) which draws on a development of the panel data approach. Additional theoretical developments in this area have taken place based on works of authors such as Al-Malkawi, Pillai, and Bhatti (2014) who have developed models for corporate governance, and Basov and Bhatti (2014) who apply a game theory approach to investment banking.

3. This work follows from works such as Bartram, Brown, and Conrad (2011), Aretz and Bartram (2010), Bali, Hume, and Martell (2007) and Hentschel and Kothari (2001), works that question the effectiveness of derivatives covering foreign exchange, interest rate, and commodities risk.

4. However, in the GCC context, there has been no comprehensive corporate governance index to date (Al-Malkawi, Pillai, and Bhatti 2014).

5. The combined market capitalization excluding the financial sector ($503 billion in 2013) is about 50% of the total market capitalization of $977 billion, as reported in Table 2.

6. We recognize that gearing ratios for Brazil companies are typically higher than for GCC countries. We calculated an average gearing ratio across 255 Brazilian industrial public listed companies as more than double of the ratio for companies in the GCC (128% compared to 59%).