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Open Access
Article
Publication date: 12 August 2022

Tabassum and Mohammad Yameen

Credit default swaps (CDSs) are among the most widely used credit derivatives since their innovation and designed to hedge the credit risk of reference entities. They were exposed…

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Abstract

Purpose

Credit default swaps (CDSs) are among the most widely used credit derivatives since their innovation and designed to hedge the credit risk of reference entities. They were exposed after the global financial crisis of 2007–08, and were blamed for its occurrence. This paper aims to describe the fundamental mechanism of CDSs, demonstrating how a CDSs contract works. Further, this study explores the growth of the global and Indian CDS market by taking a holistic perspective.

Design/methodology/approach

An objective-driven descriptive research design is adopted to achieve a rigorous and accurate analysis of the study. Therefore, research papers from high-impact journals have been carefully reviewed to achieve the aim of the study.

Findings

The study shows that CDSs are still in their infancy in India. Banks are the primary market makers and users in the Indian CDSs market; therefore, regulatory authorities must assist them to boost the market. For banks to become more confident, they should gain experience and knowledge from other active CDSs markets around the world.

Originality/value

This study attempts to provide insights into the current state of the global as well as the Indian CDS market. Further, this study suggests approaches for the Indian banking sector to play an active role in the Indian CDSs market.

Details

Journal of Money and Business, vol. 2 no. 2
Type: Research Article
ISSN: 2634-2596

Keywords

Open Access
Article
Publication date: 2 June 2022

Ruzita Abdul-Rahim, Adilah Abd Wahab and Mohammad Hudaib

Drawing upon underinvestment theory and clientele effect hypothesis, this paper aims to examine the effects of foreign currency (forex) exposure and Shari’ah-compliant status on…

1939

Abstract

Purpose

Drawing upon underinvestment theory and clientele effect hypothesis, this paper aims to examine the effects of foreign currency (forex) exposure and Shari’ah-compliant status on firms’ financial hedging strategy.

Design/methodology/approach

Based on data of 250 nonfinancial firms listed on Bursa Malaysia from 2010 to 2018 (2,250 firm-year observations), the authors test the impact of forex exposure based on a vector of foreign-denominated cash flows (FCF) indicators and firms’ Sharīʿah-compliant status on two proxies of financial hedging decisions, namely, the ratio of the notional value of currency derivatives to total assets and a binomial measure of hedging status. The hedging decision models are estimated using panel logistic regression and system generalized method of moments.

Findings

The results indicate significant positive effects of the forex exposure indicators on firms’ propensity to hedge. However, the impact of forex exposure is most prevalent via total FCF. The results also reveal significant positive effects of Sharīʿah-compliant status on firms’ propensity to hedge but its negative impacts on the value of currency derivatives they use. The results suggest that Sharīʿah-compliant firms refrain from engaging in currency derivatives to avoid riba’ and subsequently subdue the clientele effect. However, when the forex exposure reaches higher levels, engagement in currency derivatives becomes a matter of tentative necessity (dharurat).

Research limitations/implications

This study relies exclusively on the disclosure of foreign currency risk and management data in the annual reports of listed companies. Consequently, this limits the sample size to only those nonfinancial listed companies with complete data for the study period. Also, since none of the companies reports using Sharīʿah-compliant derivatives, the authors thus assume that they use derivative instruments that tolerate “riba.”

Practical implications

Given the significance of forex exposure on hedging decisions, the accounting profession must strictly adopt FRS 7 and FRS 139 for all listed firms to avoid market scrutiny and sustain their clientele. The results also call for the Islamic market regulators to include mandatory disclosure of conventional currency derivatives in screening firms for clearly prohibited activities to help enhance the credibility of its Islamic financial market.

Originality/value

Due to difficulty accessing relevant cash flow data, the study is among the few studies that measure forex exposure using FCF and test more proxy indicators. This study is perhaps the first to examine the Shari’ah perspective on currency derivatives in corporate forex risk management.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 16 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Open Access
Article
Publication date: 21 May 2021

Zaminor Zamzamir@Zamzamin, Razali Haron, Zatul Karamah Ahmad Baharul Ulum and Anwar Hasan Abdullah Othman

This study examines the impact of hedging on firm value of Sharīʿah compliant firms (SCFs) in a non-linear framework.

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Abstract

Purpose

This study examines the impact of hedging on firm value of Sharīʿah compliant firms (SCFs) in a non-linear framework.

Design/methodology/approach

This study employs the system-GMM for dynamic panel data to examine the influence of derivatives usage on firm value (Tobin's Q, ROA and ROE). The sample comprised of 59 non-financial SCFs engaged in derivatives from 2000 to 2017 (18 years). The Sasabuchi-Lind-Mehlum (SLM) test for U-shaped is performed to confirm the existence of the non-linear relationship.

Findings

This study concludes that hedging significantly contributes to firm value of SCFs based on the non-linear framework. This study suggests that, first, the non-linear relationship occurs due to the different degree of derivatives usage and risk. Second, firms practice selective hedging to maintain the upside potential of firm value.

Research limitations/implications

This study has important implications. First, the importance of risk management via derivatives to increase firm value, second, the evidence of selective hedging from the non-linear relationship between derivatives and firm value and third, the need for quality reporting on derivatives engagement by firms in line with the required accounting standard on derivatives.

Originality/value

This study fills the gap in the literature in relation to the risk management strategies of SCFs in three aspects. First, re-examines the relationship using recent data. Second, examines the relationship in the non-linear framework as the limited studies found in the literature on Malaysian firms are only based on linear relationship. Third, determines whether hedging undertaken by firms is optimal as this can only be addressed using the non-linear framework. This study is robust to the various definitions of firm value (Tobin's Q, ROA and ROE) and non-linear methodologies.

Details

Islamic Economic Studies, vol. 28 no. 2
Type: Research Article
ISSN: 1319-1616

Keywords

Open Access
Article
Publication date: 4 June 2021

Meong Ae Kim and Mincheol Woo

It is known that the National Pension Service (NPS) of Korea contributes to the market stability because it tends to pursue the negative feedback trading strategy in the Korean…

Abstract

It is known that the National Pension Service (NPS) of Korea contributes to the market stability because it tends to pursue the negative feedback trading strategy in the Korean stock market. While many studies deal with institutional investors’ trading in the financial derivatives market, the NPS’s trading in the derivatives market is rarely studied. Using the NPS’s trading data for the period from January 2010 to March, 2020, the authors examine the transactions of the NPS in the KOSPI200 futures market. We find that the NPS’s net investment flow (NIF) in KOSPI200 futures is negatively associated with the past returns of KOSPI200 futures and the KOPI200 index. However, we also find that the NPS’s NIF of KOSPI200 futures is positively associated with its NIF in KOSPI200 stocks. Along with the legal restriction on the NPS’s trading in the derivatives market, the result suggests that the NPS uses KOSPI200 futures to deviate the problems related to non-synchronous trading in the spot market. To the best of our knowledge, this paper is the first study of the NPS’s transactions of KOSPI200 futures. The paper suggests that the NPS does not trade KOSPI200 futures for hedging or arbitrage profit but for complementing its transactions in the spot market of KOSPI200 stocks.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 29 no. 2
Type: Research Article
ISSN: 1229-988X

Keywords

Open Access
Article
Publication date: 26 November 2020

Hyoseob Lee

This paper aims to provide the necessity to activate long-term exchange-traded derivatives (ETD) in Korea. In the era of aging, low interest rates and low economic growth, the…

Abstract

Purpose

This paper aims to provide the necessity to activate long-term exchange-traded derivatives (ETD) in Korea. In the era of aging, low interest rates and low economic growth, the investment demand for long-term financial products, and its hedging demand have steadily increased. Unfortunately, long-term ETD do not trade in Korea, and this study presents political suggestions to invigorate long-term ETD based on overseas cases and empirical analysis. Specifically, this study suggests the necessity to activate exchange traded funds (ETFs) options, long-term Korea treasury bond futures and options and long-term Volatility Index of Korea Composite Stock Price Index future and options. The introduction of those long-term ETD not only contributes to providing long-term investment and hedging vehicles but also reduces market inefficiencies in the Korean industry of ETFs, bonds and structured products.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 28 no. 3
Type: Research Article
ISSN: 1229-988X

Keywords

Open Access
Article
Publication date: 30 November 2015

Myeong-Hoon Yeom and Jae-Seung Baek

This study focused on the Korea ETF which is listed and traded in NYSE (New York stock exchange) and analyzed empirically the price discovery effect of NYSE Korea ETF on the…

17

Abstract

This study focused on the Korea ETF which is listed and traded in NYSE (New York stock exchange) and analyzed empirically the price discovery effect of NYSE Korea ETF on the Korean stock market. There was almost no related research even though the Korea ETF listed in NYSE did not only show high correlation with the Korean stock market but also was often used as a predictive tool of the Korean stock market by investors.

The significance of this study is in conducting a price discovery analysis on the Korea ETF traded in NYSE by using sample data of ‘iShares MSCI South Korea Capped (symbol: EWY)' of the most abundant liquidity among Korea ETF traded in NYSE. Also, the Korea ETF traded at in Korean nighttime is the spot trading, but since the KOSPI200 nighttime futures are the derivatives trading, there is an implication that the price discovery effect between spot market and derivatives market can be compared by comparing each price discovery effect.

Details

Journal of Derivatives and Quantitative Studies, vol. 23 no. 4
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 28 June 2021

Mincheol Woo and Meong Ae Kim

The National Pension Service (NPS) of Korea is one of the largest institutional investors in the world and it has been known as the market stabilizer in the Korean stock market

Abstract

The National Pension Service (NPS) of Korea is one of the largest institutional investors in the world and it has been known as the market stabilizer in the Korean stock market. Nevertheless, it is hard to find the research about the impact of the NPS on the futures market. We investigated the effect of the NPS’s trading KOSPI200 futures on the returns, the liquidity and the volatility of the market using the recent ten years’ transaction data. The main findings are as follows. First, the NPS’s net investment flow (NIF) in the KOSPI200 futures market shows the predictability about the returns of both KOSPI200 futures and KOSPI200 spot index. Second, the NPS’s NIF in the KOSPI200 futures market improves the liquidity of the KOSPI market, where the transactions involved in both the spot market and the futures market occur. Third, the NPS’s NIF in the KOSPI200 futures market reduces the volatility of both the KOSPI200 futures market and the KOSPI market. Unlike the prior studies showing that our futures market tends to increase the volatility of the stock market through the volatility transfer, our finding suggests that the NPS’s trading KOSPI200 futures contributes to decreasing the volatility in both markets. To the best of the authors’ knowledge, this paper is the first study that investigates the impact of the NPS’s trading KOSPI200 futures on the KOSPI200 futures market and the stock market. It shows that the NPS plays a role of the market stabilizer in the futures market. In addition, the NPS’s trading KOSPI200 futures also affects the KOSPI stock market, stabilizing it in terms of both the liquidity and the volatility.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 29 no. 3
Type: Research Article
ISSN: 1229-988X

Keywords

Open Access
Article
Publication date: 10 September 2021

Jun Sik Kim and Sol Kim

This paper investigates a retrospective on the Journal of Derivatives and Quantitative Studies (JDQS) on its 30th anniversary based on bibliometric. JDQSs yearly publications…

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Abstract

This paper investigates a retrospective on the Journal of Derivatives and Quantitative Studies (JDQS) on its 30th anniversary based on bibliometric. JDQSs yearly publications, citations, impact factors, and centrality indices grew up in early 2010s, and diminished in 2020. Keyword network analysis reveals the JDQS's main keywords including behavioral finance, implied volatility, information asymmetry, price discovery, KOSPI200 futures, volatility, and KOSPI200 options. Citations of JDQS articles are mainly driven by article age, demeaned age squared, conference, nonacademic authors and language. In comparison between number of views and downloads for JDQS articles, we find that recent changes in publisher and editorial and publishing policies have increased visibility of JDQS.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 29 no. 4
Type: Research Article
ISSN: 1229-988X

Keywords

Open Access
Article
Publication date: 12 April 2023

Michael O'Neill and Gulasekaran Rajaguru

The authors analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, −1x inverse and 2x leveraged products. The authors assess their impact on the VIX…

Abstract

Purpose

The authors analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, −1x inverse and 2x leveraged products. The authors assess their impact on the VIX Futures index benchmark.

Design/methodology/approach

Long-run causal relations between daily price movements in ETPs and futures are established, and the impact of rebalancing activity of leveraged and inverse ETPs evidenced through causal relations in the last 30 min of daily trading.

Findings

High frequency lead lag relations are observed, demonstrating opportunities for arbitrage, although these tend to be short-lived and only material in times of market dislocation.

Originality/value

The causal relations between VXX and VIX Futures are well established with leads and lags generally found to be short-lived and arbitrage relations holding. The authors go further to capture 1x long, −1x inverse as well as 2x leveraged ETNs and the corresponding ETFs, to give a broad representation across the ETP market. The authors establish causal relations between inverse and leveraged products where causal relations are not yet documented.

Details

Journal of Accounting Literature, vol. 46 no. 2
Type: Research Article
ISSN: 0737-4607

Keywords

Open Access
Article
Publication date: 17 September 2021

Mincheol Woo and Meong Ae Kim

Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to…

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Abstract

Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to predict future returns of stocks using informed traders' behavior in the options market. In this study, we examine whether the trading volume ratios of single stock options have the predictive power for future returns of the underlying stock. By analyzing the stock price responses to the “preliminary announcement of performance” of 36 underlying stocks on the Korea Exchange from November 2014 to March 2021 and the trading volume of options written on those stocks, we investigate the relation between the option ratios, which are the call option volume to put option volume ratio (C/P ratio) and the option volume to stock volume ratio (O/S ratio), and the future returns of the underlying stock. We also examine which ratio is better in predicting the future returns. The authors found that both option ratios showed the statistically significant predictability about future returns of the underlying stock and that the return predictability of the O/S ratio is more robust than that of the C/P ratio. This study shows that indicators generated in the options market can be used to predict future underlying stock returns. Further, the findings of this study contributed to a dearth of literature pertaining to single stock options. The results suggest that the single stock options market is efficient and influences the price discovery in the stock market.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 29 no. 4
Type: Research Article
ISSN: 1229-988X

Keywords

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