Value of Financial Derivative Contracts Disclosed by NIFTY50 Companies and Its Relation with Ownership and Leverage

Abstract

The companies enter into derivative contracts to hedge their financial risk such as risk arising due to changes in the foreign exchange rates, interest rates, prices of commodities. The contracts may be exchange traded options and futures; or over the counter contracts forwards and swaps. When the companies enter into derivative contract, it results into an asset. According  to the guidance note issued by ICAI, the value of the derivative contract is shown at fair value in the balance sheet. When the fair value is positive, the derivatives are carried as assets and when such value is negative, the derivatives are carried as liabilities. This guidance note is not applicable to banking, financial services and insurance (BFSI) companies. Among the NIFTY50 companies, there are 39 non-BFSI companies. For the financial year ending 31^st March, 2022, 11 companies have no derivative contracts, 8 companies are disclosing as fair value as liability and 20 companies are disclosing as asset. The study found that there is no statistically significant difference in the fair value of derivative contracts for government companies, companies having Indian private ownership and foreign companies. It is also observed, there is no statistically significant relationship between the fair value of the derivatives and leverage of the companies.