Behavior Study on Currency Hedging Using Foreign Currency Derivatives-Case Study of Chunghwa Telecom Co.

• Main Authors: AiLin Ko, 柯藹琳
• Other Authors: Edwin Tang
• Format: Others
• Language: zh-TW
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/60767141677120287052

碩士 === 國立交通大學 === 企業管理碩士學程 === 96 === The using ratio of foreign derivatives is getting higher by year in Taiwan foreign currency transactions. However, historically, since the mid-1980s there have been some spectacular losses in American derivative market. Surprisingly, of the conservative Taiwan currency market, Chunghwa Telecom Co. (CT) announced that it’s unrealized currency lost reached 4 billion NT dollars as a result of trading a 10-year, 1.4 billion notional amount foreign currency derivative. Because this mishap is hard to be seen in Taiwan currency market, our study will be illustrated by this case at first, from why Chunghwa Telecom Co. chose this financial instrument to hedge, what impact have been made on CT to what proper actions should be taken by CT in order to clear so many irrational decisions made by CT. Furthermore, this study aims to propose the proper attitude an enterprise should has from the view of Behavioral Finance when using foreign currency derivatives, standard or exotic derivatives, to hedge before choosing the most suitable derivatives. The main discoveries and arguments are as follows: 1. The hedging brings CT a lost around a few millions per period in cash flow. However, its Fair-value has to be listed on income statement because of its trading purpose. Thus, this hedging made a small impact on working capital but a sheer drop in EPS. 2. Explained by the theory of over confidence and blind optimism, the aberration in decision behavior of CT could result from the framework of hedging cost, the change of finance policy and enterprise environment, representativeness heuristic in the intervention of central bank of the republic of China, hindsight in the forecast of exchange rate. 3. Suggest CT continue this hedging contract until the opportune time. 4. From the view of corporate governance, unfamiliarity with derivatives and lack of risk analysis made this hedging proposal approved too easily. Thus, not only the hedger and manager but also the board should be responsible for the losses of investors. 5. Besides choosing the most suitable hedging instrument, enterprise is suggested to examine its attitude from 3 aspects: ensure you fully understand the trades you are doing, ensure a hedger does not become a speculator, and ensure you thoroughly forecast exchange rate. Finally, consult with your certifying certified public accountant.