Abstract:

The current study aims to investigate the factors affecting firm’s decision to use foreign exchange derivatives. Sample of the study was taken from non-financial companies of Pakistan Stock Exchange, out of which 90 firms (which uses the Foreign exchange derivative (FX) were considered as sample for the study. The data was secondary in nature and was collected from annual reports of listed companies of Pakistan stock exchange, while the stock prices were collected from business recorder website. For the data analysis this study has used Logit model. The empirical outcomes shows that the financial distress costs have positive and significant effect on Foreign Exchange derivatives whereas Interest coverage ratio and size have significant effect on derivative. Assets growth over cash flow has insignificant effect of Foreign Exchange derivatives. Those firms who have higher foreign sale are more likely to use the instruments of Foreign Exchange derivative. The firms that are on larger magnitude restrict over financial distress are more likely to use Foreign Exchange. Future research could be focused on determining the factors influencing the usage of interest rate derivative instruments and extent of such derivative usage.

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