This paper attempts to fill an important gap in the empirical literature pertaining to the determinants of hedging by focusing on an upper-income developing country, Mauritius. Indeed, earlier empirical evidences on hedging were mainly based on advanced economies with little emphasis on developing countries. From the data on Mauritian firms for the year 2005-06, it transpires that managers' incentives to hedge and tax convexity motive to hedge, along with financial and operational explanations underlying hedging, are basically not applicable in Mauritius. The size and age of firms are found to be positively related to hedging, endorsing the fact that high fixed costs and knowledge in establishing a derivative framework are important.

The empirical literature on the determinants of hedging has overwhelmingly focused on advanced economies. Distinct reasons have been advanced to encourage firms to hedge, such as the financial distress costs, underinvestment hypothesis, convexity of tax structure and others. However, to date, no work has been entertained in this field for a developing country.

An insight into how Mauritian firms really hedge their foreign exchange risk becomes a sine qua non. First, local firms can resort to forwards which are provided by local commercial banks. The benefit attached to forward contracts is that they do not require any initial or maintenance margin account. Another cost-saving advantage is that the fees or commissions applied are low since the bank is providing a whole set of facilities such as overdraft, documentary credit, bank guarantees and loans. Second, practitioners are conversant with the fact that the rupee has consistently been depreciating against the US dollar, euro and pound sterling. Subsequently, for an exporter, the need to hedge its receipts, denominated in any of the above three foreign currencies, is not warranted.

This new research is geared towards assessing the determinants of hedging in Mauritius. The analysis is extensive as it caters to listed and unlisted firms and the top 100 companies in terms of growth and turnover, respectively. Besides, the research is interesting in the sense that it delves into the decision to hedge of an upper-income developing country, empirical evidence of which is scarce or practically nonexistent.

Financial Risk Management Journal, Empirical Literature, Financial Distress Costs, Derivatives Markets, Research and Development, R&D, Corporate Hedging, Corporate Governance, Empirical Evidence, Empirical Literature, Corporate Incentives, Risk Management Policy, Corporate Derivatives.