The Muamalat Newsletter Vol.1 2023

13 FEM Newsletter | June 2023 prevents the occurrence of negative events. Yet, hedging helps to lessen the volatility of investment and minimise loses. Apparently, wait and see strategy is not the best strategy today’s market which extensively calls for hedging practice. Foreign Currency Derivative Hedging in My Malaysia Throughout the years, foreign currency derivative hedging does not sound so foreign anymore to our financial institutions. Rapid development of the financial market in Malaysia has paved ways for so many financial reformations including the advancement in the knowledge and awareness to utilise the available financial tools. Let’s have a look on how the firms in Malaysia were less affected by the 2008 financial crisis compared to the Asian financial crisis in 1997. Firstly, we have to bear in mind that the nature of effect from the global financial crisis was different from the Asian financial crisis. While the Asian financial crisis directly targeted the currency, the global financial crisis started off in the US subprime market before emanating to other countries including Malaysia. But we still have to agree that the advancement of the risk management strategy, particularly foreign currency derivative hedging within the firms’ operation framework has tremendously helped the firms to shield considerable effects from the crises. Claiming the success of the development of foreign currency derivative hedging in Malaysia, how far exactly have we come? Using manually collected data from annual financial reports of 207 non-financial firms listed on the main board of Bursa Malaysia, we have managed to show that the percentages of firms to engage in foreign currency derivative hedging have quadrupled between 1995 to 2016. Out of the 207 sample firms, composition of hedged firms rose drastically from a mere 5.31% in 1995 to 33.82% in 2016. With this, we may applaud our institutions to successfully evolve and use of the financial tools. Such figures also indicate the effectiveness of the government’s initiative to enhance the financial market through its countless financial market blueprints On another front, majority of the firms (66.18%) opted to maintain their risk management strategy without any involvement of the foreign currency hedging tools. In line with the government’s optimistic outlook on Malaysia’s financial market, the figures indicate engaging and wide expansion potential in term of foreign currency hedging practice in the country. The shady economic outlook forecasted in 2023 should make hedging practice a good avenue for protection against market adversity. In addition, greater digital presence and broader accessibility to retail investors Table 1: Composition of Hedged and Unhedged Firms of the Sample Non- financial Firms in Malaysia, 1995-2016 With this, foreign currency derivative hedging seeks to reduce the currency exposure without affecting the overall investment and economic activities. “ “