Derivatives as Risk Hedging Instruments for Enhancing Firm Value

Amid persistent currency fluctuations and interest rate volatility across South Asian economies, firms face heightened exposure to financial risk that threatens value stability. In purview of this, the underlying work analyzes the effect of hedging techniques i.e. foreign currency derivatives, interest rate swaps, and commodity forwards on the value of firms operating in the South Asian region. The analysis draws on a sample of 116 non-financial listed firms from Pakistan, India, and Bangladesh over the period 2015 to 2024. A System-GMM approach is applied to secondary data obtained from the financial reports of sample companies, complemented by robustness checks to ensure the consistency of results. The findings reveal a strong impact of foreign currency derivatives, interest rate swaps, and commodity forwards on the value of sample firms, showing that firms employing derivative instruments achieve higher firm value through improved risk mitigation and financial stability. Theoretically, the study extends the Shareholder Wealth Maximization framework by establishing the value relevance of structured hedging in emerging markets. Managers should integrate these instruments into risk management frameworks to mitigate financial volatility and improve performance stability. Practically, the findings highlight the importance of stronger governance mechanisms, including enhanced risk disclosure and formalized hedging policies, to support effective financial risk management. This study uniquely provides empirical evidence on the value-enhancing role of multiple derivative instruments in the South Asian context using a System-GMM approach.