Navigating Financial Risks: An Examination of Hedging Derivatives in Mitigating Market and Credit Riskvs

This study investigates the utilization of hedging derivatives as a critical tool for managing market and credit risks among five prominent companies operating across different sectors in Egypt. The companies examined in this research include Telecom Egypt (telecommunications), Orascom Construction Industries (construction), Edita Food Industries (food manufacturing), Commercial International Bank (CIB) (banking), and Ezz Steel (steel production). Each of these firms faces unique financial challenges due to fluctuating macroeconomic conditions, including currency exchange rate volatility, interest rate fluctuations, and commodity price changes. Given Egypt’s evolving economic landscape, particularly after the flotation of the Egyptian pound in 2016 and the subsequent monetary and fiscal reforms, these companies have adopted various derivative instruments—such as forward contracts, futures, options, and swaps—to hedge against these risks. This research, titled "Navigating Financial Risks: An Examination of Hedging Derivatives in Mitigating Market and Credit Risks," provides an in-depth analysis of the effectiveness of these hedging strategies, examining how these financial tools contribute to stabilizing cash flows, maintaining profit margins, and protecting company value amidst external volatility. By comparing the risk management approaches of these five firms, the study highlights the advantages and limitations of derivative usage in emerging markets, particularly in Egypt. The findings suggest that while derivatives significantly reduce exposure to financial risks, challenges such as counterparty risk, regulatory constraints, and market liquidity continue to pose obstacles for businesses. The study further explores how these companies balance the benefits of hedging with the potential costs and risks introduced by derivative instruments. Moreover, this research offers broader insights into the role of derivatives in enhancing financial stability within Egypt’s economy. It suggests that effective risk management through the use of derivatives can not only protect individual businesses but also contribute to the overall resilience of the financial system. The study concludes with recommendations for both policymakers and businesses, proposing regulatory adjustments that can foster a more robust and transparent derivatives market while encouraging companies to refine their risk management practices to better navigate Egypt’s volatile economic environment.