1. Introduction
We address questions that are central to understanding New Zealand firms' export performance: To what extent are exporters exposed to currency volatility and to which currencies are they most exposed? How do exporters hedge these exposures? Within this question, related questions arise: Do some or all firms hedge? Do different types of firms (e.g. by size or sector) display different hedging practices? Does the "cost" of hedging (forward points) make any difference to hedging decisions? Is hedging consistent over the exchange rate cycle or do (some) exporters selectively hedge when the exchange rate reaches historical extremes? Has selective hedging been a profitable strategy for New Zealand exporters? We access a unique unit record database – New Zealand Customs data – to address these questions.
Firms face many risks. One set of risks faced by exporters and other firms relates to variability in earnings due to exchange rate changes. A long-standing theorem in finance (Modigliani and Miller, 1958) suggests that hedging these risks adds nothing to firm value; given any positive cost of hedging they should therefore be left unhedged.
In practice, however, many firms do hedge currency exposures. Recent finance literature proposes certain circumstances where costly hedging may constitute optimal behaviour. In these circumstances, certain classes of firm may consistently choose to hedge and others to remain unhedged. Empirical tests confirm the validity of some hypotheses regarding optimal hedging, but not all. Further, there is tentative evidence in some industries internationally of selective hedging – i.e. choosing hedging positions so as to "time the market". Hypotheses have been developed to indicate when certain types of firms may choose to selectively hedge, but early results suggest that firms may not behave optimally in this respect, especially in relation to financial market exposures.
The literature concentrates almost exclusively on the hedging behaviour of large (generally listed) firms. Very little is known about behaviour of exporters (or other firms) more widely. Little is also known about the overall currency hedging behaviour of New Zealand firms. Most domestic research has considered the behaviour of listed firms; one study covers a broader sample of firms but is a single snap-shot so one cannot interpret whether the results are representative of behaviour across the cycle.
In contrast to all previous domestic and international studies, we examine the hedging behaviour of a large set of firms, being all New Zealand merchandise exporters. We do so for a continuous ten year period, thereby examining patterns both across time and across specific cycles and events. We use data available on a daily basis for all exporters at the 10-digit commodity level. Further, we are able to link the export and currency hedging behaviour of exporters to the same firms' financial data derived from Statistics New Zealand's newly compiled Longitudinal Business Database (LBD).1
We use these data sources to compile descriptive statistics of behaviour and to test hypotheses concerning the presence, and impacts, of selective hedging. Future analysis will utilise the longitudinal nature of the data to conduct econometric tests of these hypotheses at the unit record level.
The paper proceeds as follows. In section 2, we review the international theory and evidence relating to hedging behaviour in general, and currency hedging behaviour in particular. Section 3 conducts a similar review in relation to New Zealand evidence. Section 4 discusses our data and sets out hypotheses that we wish to examine. Section 5 presents derived series and comments on their relationships to some of the hypotheses. Section 6 specifically examines the practice of selective hedging, testing for its presence and testing whether, on balance, it has been a profitable strategy. Section 7 summarises our findings and suggests potential future work.
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