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1 – 10 of 358Li Wang and Stephen Makar
This paper aims to examine the foreign exchange (FX) risk effects of cash flow hedge accounting (HA). To the extent the HA qualification criteria and detailed documentation give…
Abstract
Purpose
This paper aims to examine the foreign exchange (FX) risk effects of cash flow hedge accounting (HA). To the extent the HA qualification criteria and detailed documentation give investors confidence that FX derivatives effectively hedge risk, market-assigned FX risk premiums will be lower for firms using cash flow HA.
Design/methodology/approach
Probit analyses rely on the HA designation to examine the decision to use cash flow HA. Primary analyses test the hypothesized relationship between the magnitude of FX risk premiums and such HA use. Additional analyses allow for the interaction between cash flow HA use and the extent of FX derivatives use.
Findings
Hypothesis tests indicate that the magnitude of the FX risk premium is, on average, lower for firms designated as effective cash flow hedgers. In additional tests, the evidence suggests that the market assigns a lower FX risk premium to firms using a higher level of FX derivatives as effective cash flow hedges.
Practical implications
The findings suggest that cash flow HA provides risk-relevant information to investors. Such positive effects of HA on investors’ understanding of risk management may guide US accounting regulators in their efforts to improve HA. Corporate treasurers also may benefit from these insights into evaluating the use of HA.
Originality/value
Responding to the call for research on the risk relevance of cash flow HA, this paper merges the HA literature with the FX risk management literature to directly examine the relationship between HA use and FX risk premiums for manufacturing firms. The authors take an innovative approach using FX rates to which each firm is most exposed and provide evidence consistent with the argument that this approach is helpful in understanding both the decision to use cash flow HA and the effect of such HA use on market-assigned FX risk premiums.
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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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In the last two decades, a number of studies have examined the risk management practices within nonfinancial companies. For instance, some studies report on the use of derivatives…
Abstract
Purpose
In the last two decades, a number of studies have examined the risk management practices within nonfinancial companies. For instance, some studies report on the use of derivatives by nonfinancial firms. Yet, another group of researchers has investigated the determinants of corporate hedging policies. These and other studies of similar focus have made important contributions to the literature. This study sheds light on derivatives use and risk management practices in the UK market.
Design/methodology/approach
This paper presents the results of a questionnaire survey, which focused on determining the reasons for using or not using derivatives for 401 UK nonfinancial companies. Furthermore, it investigates the extent to which derivatives are used, and how they are used.
Findings
The results indicate that larger firms are more likely to use derivatives than medium and smaller firms, public companies are more likely to use derivatives than private firms, and derivatives usage is greatest among international firms. The results also show that, of firms not using derivatives, half of firms do not use these derivative instruments because their exposures are not significant and that the most important reasons they do not use derivatives are: concerns about disclosures of derivatives activity required under FASB rules, and costs of establishing and maintaining derivatives programmes exceed the expected benefits. The results show that foreign exchange risk is the risk most commonly managed with derivatives and interest rate risk is the next most commonly managed risk. The results also indicate that the most important reason for using hedging with derivatives is managing the volatility in cash flows.
Research limitations/implications
As with other survey research, a major limitation is that responses might represent personal opinions. We cannot verify that the opinions coincide with actions. We suggest that further research could improve the understanding of firms’ derivatives use by including more detailed data, different time spans, and larger samples.
Originality/value
To highlight the extent of derivatives usage and risk management practices in UK nonfinancial companies.
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Stephen Makar and Stephen Huffman
Using firm‐specific SEC currency risk disclosures, this paper aims to provide insight into the puzzling absence of significant returns‐based foreign exchange exposure (FXE). Such…
Abstract
Purpose
Using firm‐specific SEC currency risk disclosures, this paper aims to provide insight into the puzzling absence of significant returns‐based foreign exchange exposure (FXE). Such a hand gathered disclosure data identify the bilateral exchange rate to which the firm is most vulnerable (BRV) and the firm's FX hedge techniques.
Design/methodology/approach
The BRV‐based estimates of FXE are compared to the FXE estimates using the broad trade‐weighted index (TWI) data that are prevalent in prior research. Multivariate regression and sample partitioning by level of value and size premiums are used to analyze these alternative FXE estimates.
Findings
The univariate results reveal a higher percentage of firms with significant BRV‐estimated FXE compared to TWI‐estimated FXE. Multivariate tests indicate a negative relation between firm‐specific financial hedging and BRV‐estimated FXE (but not TWI‐estimated FXE), controlling for firm‐specific non‐financial/operational hedging, size and industry effects. Moreover, firms in the first and fifth quintiles for measures of value/growth and size have higher levels of FXE.
Practical implications
Using SEC currency risk disclosures improves the analysis of firm‐specific FXE, allowing investors to better estimate risk and cost of capital.
Originality/value
The paper helps resolve the FX exposure puzzle using a unique dataset of firm‐specific currency risk disclosures. The improved estimates of FXE provide a more detailed risk profile of multinational firms.
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PHILIP KAMAU, ENO L. INANGA and KAMI RWEGASIRA
The purpose of this paper is to investigate the extent to which multilateral banks (MBs) use currency derivatives (CDs) to hedge and speculate in managing currency risk. It aims…
Abstract
Purpose
The purpose of this paper is to investigate the extent to which multilateral banks (MBs) use currency derivatives (CDs) to hedge and speculate in managing currency risk. It aims to provide an empirical assessment of CDs products used by MBs as a group not studied before.
Design/methodology/approach
Quantitative hypothesis regarding the usage of CDs to minimize adverse impact of currency risk was tested using z test about population proportion.
Findings
The results show that MBs are using CDs in the following order of importance: currency swaps, currency forwards, currency options and currency futures primarily to hedge currency risk.
Research limitations/implications
The results of the study can be generalized only for MBs, given their peculiar characteristics as wholesale banks, which are owned mainly by governments and are generally not listed in the stock exchanges.
Originality/value
The study is of value to those interested in the multilateral banking industry. The authors acknowledge that it is the first study providing empirical evidence on CDs’ usage by MBs as a group. The results are particularly useful to managers of MBs in terms of helping them to make choices in usage of CDs. The paper has also policy implications in terms of justifying the current self-regulatory status, shareholder monitoring and governance of MBs, as they do not speculate with CDs.
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Varuna Kharbanda and Archana Singh
Corporate treasurers manage the currency risk of their organization by hedging through futures contracts. The purpose of this paper is to evaluate the effectiveness of hedging by…
Abstract
Purpose
Corporate treasurers manage the currency risk of their organization by hedging through futures contracts. The purpose of this paper is to evaluate the effectiveness of hedging by US currency futures contracts by taking into account the efficiency of the currency market.
Design/methodology/approach
The static models for calculating hedge ratio are as popular as dynamic models. But the main disadvantage with the static models is that they do not consider important properties of time series like autocorrelation and heteroskedasticity of the residuals and also ignore the cointegration of the market variables which indicate short-run market disequilibrium. The present study, therefore, measures the hedging effectiveness in the US currency futures market using two dynamic models – constant conditional correlation multivariate generalized ARCH (CCC-MGARCH) and dynamic conditional correlation multivariate GARCH (DCC-MGARCH).
Findings
The study finds that both the dynamic models used in the study provide similar results. The relative comparison of CCC-MGARCH and DCC-MGARCH models shows that CCC-MGARCH provides better hedging effectiveness result, and thus, should be preferred over the other model.
Practical implications
The findings of the study are important for the company treasurers since the new updated Indian accounting standards (Ind-AS), applicable from the financial year 2016–2017, make it mandatory for the companies to evaluate the effectiveness of hedges. These standards do not specify a quantitative method of evaluation but provide the flexibility to the companies in choosing an appropriate method which justifies their risk management objective. These results are also useful for the policy makers as they can specify and list the appropriate methods for evaluating the hedge effectiveness in the currency market.
Originality/value
Majorly, the studies on Indian financial market limit themselves to either examining the efficiency of that market or to evaluate the effectiveness of the hedges undertaken. Moreover, most of such works focus on the stock market or the commodity market in India. This is one of the first studies which bring together the concepts of efficiency of the market and effectiveness of the hedges in the Indian currency futures market.
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Philip Kamau, Eno L. Inanga and Kami Rwegasira
The purpose of this paper is to investigate the extent to which the size of multilateral banks (MBs) influences their usage of currency derivatives to manage currency risk. It…
Abstract
Purpose
The purpose of this paper is to investigate the extent to which the size of multilateral banks (MBs) influences their usage of currency derivatives to manage currency risk. It provides an empirical assessment of whether economies of scale and scope found in other studies apply to MBs.
Design/methodology/approach
A quantitative hypothesis regarding the relationship of the size of MBs to their usage of currency derivatives was tested using regression, correlation and analysis of variance.
Findings
The results show that there is a significant positive relationship between size (as measured by total assets) of MBs and the total principal amounts of currency derivatives used. These results suggest that MBs are enjoying economies of scale and scope in using currency derivatives in managing currency risk.
Research limitations/implications
The data used were obtained from annual reports that may not fully provide relevant information that could influence the usage and size of currency derivatives. Future studies may therefore use surveys to obtain data to conduct multivariate regression analysis to provide further insights on other determinants of currency derivatives usage.
Originality/value
The study is of value to those interested in multilateral banking. It breaks new ground by using non-survey method for the first time in investigating the relationship between size and currency derivatives used by MBs. The results are also useful for financial institutions selling currency derivative products to MBs in identifying which to target. For managers of small MBs it may be cost effective for them to use internal hedging techniques as economies of scale applies in currency derivative markets. The results of the study are also useful to policy and regulation of MBs.
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Hong Bae Kim and Sang Hoon Kang
This study investigated the relationship between the CDS (credit default swap) market with the FX spot (FX swap) market, including the period of recent global financial crisis.A…
Abstract
This study investigated the relationship between the CDS (credit default swap) market with the FX spot (FX swap) market, including the period of recent global financial crisis.
A measure for market efficiency is the condition that the derivative markets dominate the asset market in price discovery. In our case, however, FX market should be leading the CDS market. We found FX (spot and Derivatives) market has co-integration relationship with CDS market. Looking at Gonzalo Granger (GG) and Hasbrouck's price discovery measure, we found the FX spot and derivatives market dominated CDS market in price discovery.
This study has also examined the direction of shock spillover and volatility transmission between Korean CDS spread and Foreign exchange spot (FX swap) markets using the VECM bivariate GARCH approach. Our evidence suggested the presence of bi-directional shock volatility and volatility transmission between the CDS market and FX spot market partially exist. However, volatility spillover effects from CDS market to FX Swap market are stronger than in the reverse direction during the global financial crisis, indicating that the CDS spread signaling sovereign risk play a more important role in influencing the volatility of FX derivatives market.
There are some particular features in FX market. The volatility and shock of CIP deviations reflecting arbitrage opportunities in FX swap market are influenced by those of CDS spread in tranquil period prior to Lehman failure. But after Lehman failure CDS played a crucial role in signaling credit risk in FX derivatives market. We found that higher liquidity and trading volume of market matters more in price discovery and information transmission.
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Harvey Arbeláez and E.K. Gatzonas
The 2007 BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity Report shows a substantial increase in turnover in foreign exchange and OTC…
Abstract
The 2007 BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity Report shows a substantial increase in turnover in foreign exchange and OTC derivatives markets. Turnover in traditional FX markets increased to reach $3.2 trillion. The largest contributor to this 71% increase between April 2004 and April 2007 occurred in FX swaps. It was like a prelude to the financial crisis of 2007–2008 driven by transactions carried out between banks and other financial institutions due to the significance of hedge funds and major engagement of emerging market currencies which have sought new configurations of portfolio diversification worldwide.