Financial Derivatives and Firm Value in Nigeria’s Investment Firms: The Moderating Role of Exchange Rate Volatility

Background: Financial derivatives have become widely used by firms to manage exposure to market risks such as interest rate, foreign exchange, and commodity price volatility. While derivatives are designed to hedge risk, their effect on firm value remains debated in empirical literature. Some studies suggest that derivatives enhance value through reduced cash flow volatility and improved financial stability, whereas others highlight potential costs arising from misuse and speculative behaviour. This mixed evidence makes the relationship between financial derivatives and firm value an important area of investigation.

Aim: Based on this, this study examined the effect of financial derivatives on firm value of listed investment firms in Nigeria, with particular emphasis on the moderating role of exchange rate volatility (ERV).

Methodology: This study employed an ex post facto research design covering from 2015 to 2024, using retrospective data from the administrative and financial records of investment firms listed on the Nigerian Exchange Group. The period was selected because 2015 marked major changes in exchange rate management and a phase of heightened FX volatility during which derivative usage expanded. Secondary data were sourced from annual reports and audited financial statements, and all ten listed investment firms formed the census sample. Data analysis involved descriptive statistics, correlation analysis, diagnostic tests, and panel regression to evaluate the effects of financial derivatives and exchange rate volatility on firm value.

Findings: The findings implied that derivative assets enhance market valuation through hedging and signalling benefits, whereas derivative liabilities erode value through leverage and distress exposure, and that currency instability constrains the value creation potential of derivative assets.

Contributions: This study would benefit multiple stakeholders. Managers of listed investment firms will volatility. Investors and shareholders will benefit from improved understanding of firms' risk management strategies and their value implications. Regulators and policymakers will find the results useful for strengthening guidelines on derivative usage and financial stability. Academics and researchers will also benefit from the study's context specific evidence and extended analytical framework in an emerging market setting.

Recommendations:
Regulators: Regulators such as the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) should enforce stricter disclosure requirements on derivative usage, particularly liabilities, to enhance transparency and reduce information asymmetry in the market. Policymakers: Policymakers should stabilize the macroeconomic environment by addressing persistent exchange rate instability, as excessive volatility diminishes the protective role of derivatives and undermines firm value in the long run.
Management: Boards of directors and audit committees should institute stronger governance oversight to ensure that derivative positions are effectively monitored and integrated into the overall corporate strategy. Firms should adopt robust currency risk management strategies, including diversification of hedging instruments, to cushion the destabilizing effect of exchange rate volatility.
Researchers: Future research should expand sectoral coverage beyond investment firms by including manufacturing, banking, and oil and gas firms to enhance external validity. Multi-country studies across Sub Saharan Africa or emerging markets would enable stronger comparative insights on derivative practices and regulatory environments. Researchers should also explore alternative valuation metrics such as enterprise value, market to book ratios, or discounted cash flows to capture multi dimensional firm valuation outcomes. Finally, qualitative or mixed methods approaches could examine governance, disclosure quality, and managerial incentives underlying derivative strategies, which cannot be captured through archival data alone.