AR = 0.004048 + 0.023569( FCCB Ratio)-0.01227
T
( imports ratio)-0.26104( AR)( T-1)
The regression analysis was conducted using the software-Eviews. The output( Table 1) is as below:
Table 1: Eviews Regression Analysis Output
An important finding which is related to the field of finance and research methodology was that even the R-squared is not the last measure to know the explanation power of a regression. Even though the R-squared value for our analysis is lower, it does not degrade the explanation given by the model.
Variable |
Coefficient |
Std. error |
t-statistic |
Probability |
Constant |
0.004048 |
0.00344 |
1.176774 |
0.2413 |
FCCB Ratio |
0.023569 |
0.006692 |
3.521885 |
0.0006 |
FX Earnings Ratio |
0.00718 |
0.007688 |
0.933972 |
0.3519 |
Imports Ratio |
-0.01227 |
0.006087 |
-2.0163 |
0.0456 |
Annual Returns |
-0.26104 |
0.07984 |
-3.26959 |
0.0014 |
Here the independent variables that were found significant were the FCCB Ratio, imports ratio and the lagged value of total returns.
The below graph( Figure 1) explains the regression analysis and the line of fit:
Reason: In the field of financial management, a paper written by Dr. Tarun Khanna and M. Palipu, related to foreign exchange risk management has laid down the foundation of the quantitative modelling here. In their paper, they have proved that despite a low R-squared; the theory is derived from a particular panel regression model.
Also, R2 is not the only measure on which we should rely to know the regression model.
Probabilities for Fisher tests in the Excel sheet are computed using an asymptotic Chi-square distribution. All other tests assume asymptotic normality.
5.0 KEY FINDINGS & INSIGHTS
1) Large Cap are already hedging their forex risk well, while Small and Mid Cap companies need to adopt appropriate strategies.
Figure 1: Regression Analysis Line of Fit
The normality stands at 1 %. When the residuals were studied to know in case of any autocorrelation, by using tests like Jarque Bera Test, panel unit root test, it was found that there was no autocorrelation( Figure 2).
20
16
12
8
4
0-0.06-0.04-0.02-0.00 0.02 0.04 0.06
Series: Standardized Residuals Sample 2007 2012 Observations 147
Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis
Jarque-Bera Probability
-6.14e-19 2.26e-05 0.057869-0.068462 0.022244-0.279624 3.911285
7.002097 0.030166
2) The dependence of companies on external debt as a source of financing has been gradually decreasing over the years.
3) Stock returns are positively correlated to external debt financing and negatively correlated to the import of raw materials.
6.0 CONCLUSIONS
1) Forwards and Options Contracts are preferred for short-term hedging while Currency Swaps and futures are used for long-term hedging.
2) Change in regulations has helped Indian companies write option contracts including call, put, cross currency and range-barrier options.
3) Study of combination of size of organization and non-hedged exposure of firms reveals that foreign borrowings on Capital Account acts as a damper for companies.
Figure 2: JarqueBera Test output
26