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1 – 10 of over 9000To better understand corporate risk management practice in Hong Kong and Singapore. To explore popular perception that use of derivatives in Hong Kong and Singapore lags that in…
Abstract
Purpose
To better understand corporate risk management practice in Hong Kong and Singapore. To explore popular perception that use of derivatives in Hong Kong and Singapore lags that in the US. To explore possible speculative use of derivatives in these Asian countries.
Design/methodology/approach
A survey of non‐financial corporations using the format of the 1998 Wharton study. I investigated the extent to which derivatives are used, how they are used, and methods for their oversight.
Findings
Derivatives are used more extensively in Hong Kong and Singapore than in the US. They are particularly popular for managing foreign exchange risk. Their use is more speculative than is common in the US; that is, market predictions play a significant role in the size and timing of hedge trades and derivatives are often used for active management of exposures. A lack of controls and management oversight (such as derivatives policies, regular valuations) is apparent, despite the extent of derivatives use.
Research limitations/implications
Potential bias may have arisen due to the method used for recruiting survey respondents. In this study post‐graduate students contacted and interviewed company staff, often based on their personal contacts. In contrast, the Wharton surveys have been mailed to potential respondents. Students may have been more likely to select companies that traded derivatives. The sample size (131 firms) is smaller than that of the Wharton studies, but probably sufficient to establish common trends.
Practical implications
Need to address poor oversight of derivatives trading in order to prevent further disasters. Need to scrutinise the speculative use of derivatives to ensure that it is value‐adding for firm owners.
Originality/value
To highlight the extent of speculative use of derivatives in Hong Kong and Singapore. To encourage further scrutiny and controls over the use of derivatives by directors of and investors in non‐financial corporations in these countries.
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The purpose of this paper is to answer a specific research question: How have EU and US regulators translated the idea of central clearing into law?
Abstract
Purpose
The purpose of this paper is to answer a specific research question: How have EU and US regulators translated the idea of central clearing into law?
Design/methodology/approach
A meticulous legal research is carried out. First, the pre‐crisis regulatory regime for credit default swap (CDS) is reviewed, from a securities law angle as well as from a comparative Euro‐American perspective. Next, the regulatory processes leading to the adoption of the central clearing regulations are discussed. Thereafter, a material comparative analysis is made of the provisions related to central clearing in the EU and US regulatory initiatives. Finally, the paper is concluded with an evaluation of both legislations in the light of all previous analyses.
Findings
The research first shows that central clearing regulations rely on a series of presumptions, both concerning the gravity of counterparty risk threats and the necessity of central clearing. Additionally, the EU and US clearing regulations are similar with regard to the broad innovations they introduce, i.e. the mandatory central clearing of a variety of over‐the‐counter derivatives and counterparty risk management requirements for central clearing institutions and for non‐cleared swaps. However, the specific content of the provisions often differs. Furthermore, both legislations are limited to enouncing broad principles. This is also the case for the crucial provisions related to counterparty risk management. Therefore, these provisions in se do not guarantee the proper regulation of counterparty risk management practices. Consequently, much is to be expected from the implementing measures adopted by regulatory institutions.
Originality/value
The paper provides an overview of those provisions in the European and US regulations that specifically concern central clearing for CDS. It is one of the first papers which does this in a very well‐structured and clearly written manner. Also it is one of the first to provide a clear comparison between the provisions in the EU and the US regulations.
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The purpose of this paper is to demonstrate that certain rules, implemented as a result of the Dodd-Frank Act (DFA) of 2010, should be harmonized between economically equivalent…
Abstract
Purpose
The purpose of this paper is to demonstrate that certain rules, implemented as a result of the Dodd-Frank Act (DFA) of 2010, should be harmonized between economically equivalent products in swap and futures markets to prevent regulatory arbitrage.
Design/methodology/approach
The paper focuses on rules surrounding margin requirements and block size thresholds. As such, a background of clearing and exchange systems is presented to familiarize the reader with the risk management objectives of the regulation. Viewpoints of several leading commentators taken from a Commodity Futures Trading Commission roundtable and comment letters are then analysed to support the argument that margin requirements and block size thresholds should be the same for similar financial products.
Findings
Based on the review and analysis of several commentators and industry participants, harmonization of rules for swaps and economically equivalent futures contract should be achieved to prevent regulatory arbitrage.
Originality/value
To the best of the author's knowledge, there are no articles that address the swap futurization debate in this detail. This paper will be of interest to readers who would like to learn more about how the DFA has impacted the derivatives market leading to the recent trend of swap “futurization”. It is also ideal for those who are unfamiliar with current clearing and exchange systems, as it presents background detail of this framework to supplement the debate on swap rules.
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Essays a conceptural clarification and theory of the process of economicevolution. Using the Veblenian matrix, conceptualizes the economicprocess in the framework of culture and…
Abstract
Essays a conceptural clarification and theory of the process of economic evolution. Using the Veblenian matrix, conceptualizes the economic process in the framework of culture and its evolution. Economic evolution, as a gestalt, comprises the processes of both economic growth (quantitative statics) and development (qualitative dynamics). The dynamics of culture evolution is founded on the advance of technology which constitutes the “core of culture”. The essence of the process of culture evolution is contained in the dichotomy of useful knowledge. The advance of useful knowledge appears in its application as technology and in its store as culture. The process of economic evolution increases the capacity of culture and thereby enables humankind to take bigger and bigger bites of the infinity of knowledge. Culture evolution, fed by the dynamics of the economic process, offers the potential for an enhanced “consciousness of the cosmos” and as such a conception of human progress.
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In response to the 2008 financial crisis, the European Union (EU) comprehensively restructured its derivative regulation. A key component of this new framework is a reporting…
Abstract
Purpose
In response to the 2008 financial crisis, the European Union (EU) comprehensively restructured its derivative regulation. A key component of this new framework is a reporting obligation for every derivative trade. As the reporting requirement does not involve public disclosure of the information, existing academic analysis on reporting regulations to-date, which focusses on public disclosure, is limited in predicting the effectiveness of the reform. This paper aims to assess whether the reform has been designed effectively based on the regulatory setup in the UK.
Design/methodology/approach
Framing the reporting regulation as a moral hazard problem with asymmetric information, this paper uses a game-theoretical approach to evaluate whether the new derivative reporting obligation effectively induces firm compliance. I also discuss potential extensions of the derivative reporting model, with particular emphasis on how the framework could account for heterogeneous firms and different regulatory tools.
Findings
Based on the theoretical analysis, this paper finds that while firms are unlikely to comply fully with derivative reporting requirements, it is possible to induce relatively high firm compliance. Although this does not mean we are immune from another financial crisis, the derivative reporting requirements should equip EU regulators to monitor a more transparent and secure derivatives market.
Originality/value
This paper provides a theoretical foundation for further study of post-crisis derivatives reforms. In particular, the implications of the model point to an empirical strategy to test the accuracy of the model.
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Helen Xu, Eric C. Lin and John W. Kensinger
Previous studies show that crude oil is negatively correlated with stocks but has almost the same rate of return as stocks, and so adding crude oil into a portfolio with equities…
Abstract
Previous studies show that crude oil is negatively correlated with stocks but has almost the same rate of return as stocks, and so adding crude oil into a portfolio with equities can provide significant diversification benefits for the portfolio. Given the diversification benefit of crude oil mixed with equities, we examine the value effect of crude oil derivatives transactions by oil and gas producers. Differing from traditional corporate risk management literature, this study examines corporate derivatives transactions from the shareholders' diversification perspective. The results show that crude oil derivatives transactions by oil and gas producers do impact value. If oil and gas producing companies stop shorting crude oil derivatives contracts, company stock prices increase significantly. In contrast, if oil and gas producing companies initiate short positions in crude oil derivatives contracts, stock prices tend to drop (still significant, but less so). Thus, hedging by producers is not necessarily good. Transaction limitation is shown to be one of the possible sources of the value effect of corporate derivatives transactions.
Talat Afza and Atia Alam
The purpose of this paper is to identify the factors affecting firms' decision to use foreign exchange (FX) derivative instruments by using the data of 86 non‐financial firms…
Abstract
Purpose
The purpose of this paper is to identify the factors affecting firms' decision to use foreign exchange (FX) derivative instruments by using the data of 86 non‐financial firms listed on Karachi Stock Exchange for the period 2004‐2007.
Design/methodology/approach
Required data were collected from annual reports of listed firms of Karachi Stock Exchange. Non‐parametric test was used to examine the mean difference between users and non‐users operating characteristics. Logit model was applied to analyze the impact of firm's financial distress costs, underinvestment problem, tax convexity, profitability, managerial ownership and foreign exchange exposure on firms' decision to use FX derivative instruments for hedging.
Findings
Results explain that firms having higher foreign sales are more likely to use FX derivative instruments to reduce exchange rate exposure. Moreover, financially distressed large‐size firms with financial constraints and fewer managerial holdings are more likely to use FX derivatives.
Research limitations/implications
Incomplete financial instrument disclosure requirements restricted researchers to using binary variable as a dependent variable instead of notional value or fair value of derivative usage.
Practical implications
The study shows that in the presence of amateur derivative market, Pakistani corporations possessing higher agency costs of debt, agency costs of equity, and financial constraints will benefit more by defining hedging policies coherent with the firm's investment and financing policies in order to enhance firm value.
Originality/value
Until now, no earlier empirical study focused on the determinants of a firm's hedging policies in Pakistan, in the presence of volatile exchange rates,. The current study, therefore, attempts to identify the factors which affect the firm's decision to use derivative instruments for hedging FX exposure of non‐financial firms in Pakistan.
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Ales Berk Skok, Igor Loncarski and Matevz Skocir
We investigate the evolution of corporate risk management practices in Slovenian non-financial firms in the period 2004–2009 and compare the findings several surveys conducted for…
Abstract
We investigate the evolution of corporate risk management practices in Slovenian non-financial firms in the period 2004–2009 and compare the findings several surveys conducted for other countries. We mail questionaires to non-financial companies, where the target group included non-financial companies listed on Ljubljana Stock Exchange and the largest exporting companies in Slovenia. We find that the current use of derivatives for hedging purposes is still at a lower level than in the majority of developed countries. The great expansion of Slovenian economy in the period 2004–2008, the development of Slovenian financial system, the convergence of Slovenian and EU accounting standards and recent financial crisis did not sufficiently induce Slovenian firms to adopt risk management practices. The most often stated reasons for the low use of derivatives are (1) insufficient risk exposure, (2) problems with the evaluation and monitoring of derivatives and (3) the costs associated with the implementation of derivatives programme. In our opinion, the institutional environment in Slovenia does not induce managers to undertake proper risk management activities. We argue that not only managers, but also owners and creditors should be more accountable for the decisions they take (or do not take).
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