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1 – 10 of over 33000This paper aims to develop hedging strategies using both futures and forward contracts and issuing risky debt when financially constrained firms are forced to operate in long…
Abstract
Purpose
This paper aims to develop hedging strategies using both futures and forward contracts and issuing risky debt when financially constrained firms are forced to operate in long horizon.
Design/methodology/approach
The authors present a model for developing hedging strategies using both futures and forward contracts and issuing risky debt. A theoretical model employing stochastic differential equations for forward hedging is illustrated with a numerical example over parameter values consistent with the literature.
Findings
A financially constrained firm with limited cash balance must hedge its liquidity with both future and forward contracts and issue risky debt to support its long-term operations. The firm can issue a minimal amount of risky debt by adding forward contracts into hedging and can increase its value higher than that when hedging with only futures contracts. We show numerically that hedging with both futures and forward contracts allows the firm to issue minimal risky debt in increasing its firm value.
Practical implications
When Metallgesellschaft nearly collapsed in 1993, it offered long-term forward contracts to its customers and attempted to hedge its risk by rolling over series of short-term futures contract. It created the situation of inherent mismatch in maturity structure. A financially constrained firm operating in a long horizon appears to commit its liquidity as long-term forward contracts, which cannot be fully hedged with series of futures contacts. The firm should hedge its liquidity with both futures and forward contracts and avoid liquidation with deadweight costs in its long-term operation.
Originality/value
This is the first study examining hedging strategies with both futures and forward contracts.
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Brigitte Ziobrowski and Alan Ziobrowski
Recent studies on foreign investment in US real estate provideevidence that fluctuating exchange rates are likely to reduce thepotential gains from international diversification…
Abstract
Recent studies on foreign investment in US real estate provide evidence that fluctuating exchange rates are likely to reduce the potential gains from international diversification by making these investments more risky. However, other research has suggested that forward currency contracts may provide an effective mechanism for offsetting exchange rate volatility and thus restore the diversification benefits. Examines the use of forward contracts as a means of hedging the currency risk associated with foreign investment in US real estate. Indicates that, although continuous hedging of US real estate with forward contracts allows foreign investors to eliminate most of the risk induced by currency instability, the improvements are insufficient to produce diversification gains for all foreign investors in the context of meanvariance portfolio performance.
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Steen Koekebakker and Fridthjof Ollmar
The forward curve dynamics in the Nordic electricity market is examined. Six years of price data on futures and forward contracts traded in the Nordic electricity market are…
Abstract
The forward curve dynamics in the Nordic electricity market is examined. Six years of price data on futures and forward contracts traded in the Nordic electricity market are analysed. For the forward price function of electricity, we specify a multi‐factor term structure models in a Heath‐Jarrow‐Morton framework. Principal component analysis is used to reveal the volatility structure in the market. A two‐factor model explains 75 per cent of the price variation in our data, compared to approximately 95 per cent in most other markets. Further investigations show that correlation between short‐ and long‐term forward prices is lower than in other markets. We briefly discuss possible reasons why these special properties occur, and some consequences for hedging exposures in this market.
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The national objectives of forward exchange controls are to restrain speculation in foreign exchange, to limit international capital flows and to affect the forward exchange…
Abstract
The national objectives of forward exchange controls are to restrain speculation in foreign exchange, to limit international capital flows and to affect the forward exchange rates. Restrictions on forward transactions are economic welfare costs for enterprises and banks, which are analysed in terms of risk‐return and supply‐demand theory. Empirical answers to whether forward exchange control is really necessary await collection and disclosure of company currency exposure, which itself may contribute to the national objectives implicit in forward exchange controls.
This chapter aims to find an optimal way to hedge foreign exchange exposures on three main currency pairs being the EURUSD, EURGBP and EURJPY. Furthermore, it analyses the risk…
Abstract
Purpose
This chapter aims to find an optimal way to hedge foreign exchange exposures on three main currency pairs being the EURUSD, EURGBP and EURJPY. Furthermore, it analyses the risk level of each portfolio together with its kurtosis level. This chapter also looks into the relationship between the EURUSD portfolios and the VIX level.
Methodology/approach
This study is based on a back-testing analysis over a period of seven years starting in January 2007 and ending in December 2014. Two main Foreign Exchange Premium-Free strategies were structured using the Bloomberg Terminal. These were the ‘At-Expiry Forward Extra’ and the ‘Window Forward Extra’. Portfolios were created using FX options strategies, FX spot and FX forwards. The EURUSD portfolios were also analysed and compared with the VIX level in order to see whether volatility has a direct effect on the outcome of the strategies. The statistical significance of the difference between returns of portfolios was analysed using a paired sample t-test. Finally, the histogram and distribution curve of each portfolio were created and plotted in order to provide a more visual analysis of returns.
Findings
It was found that the optimal strategies in all cases were the FX option strategies. The portfolios’ risk was analysed and indicated that optimal portfolios do not necessarily derive the lowest risk. It was also found that with a high VIX level, the forward contract was the most beneficial whilst the option strategy benefited from a low VIX level. When testing for statistical significance between returns of different portfolios, in most cases, the difference in returns between portfolios resulted to be statistically insignificant. Although some similarities were noticed in distribution curves, these differed from the normal distribution. When analysing the kurtosis levels, it is found that such levels differed from that of a normal distribution which has a kurtosis level of 3. Interpretation of such histograms, distribution curves and the kurtosis analysis was explained.
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Pierre-Arnaud Henri Drouhin and Arnaud Simon
This paper aims to analyze the statistical characteristics of changes in property forward prices. As highlighted in a survey conducted at the MIT Center for Real Estate in 2006…
Abstract
Purpose
This paper aims to analyze the statistical characteristics of changes in property forward prices. As highlighted in a survey conducted at the MIT Center for Real Estate in 2006, the relatively weak understanding in their prices is one of the most important barriers in their use. In this context, the analysis of the forward price term structure is essential. Do the short- and long-term forward prices behave similarly? Do property derivatives behave like other derivative assets or other related assets? This study also investigates the lead–lag relationship between spot and forward returns for different maturities.
Design/methodology/approach
Using four years and nine months of data on the UK Investment Property Databank (IPD), all property total return swaps are examined. We strip the swaps into their forwards and study their statistical characteristics (the first four moments and their autocorrelation levels). The relationships among the forward contracts, the underlying asset (IPD index and IPD unsmoothed) and other assets (risk-free rate, listed real estate) are explored. Using the Yiu et al. (2005) methodology, the lead–lag relationship between the spot and the forwards is assessed.
Findings
The index appears to be significantly less volatile and less efficient, in terms of correlation than its own derivative contracts. Moreover, changes in forward prices are leading indicators of the IPD index. Their risks tend to converge with the implied volatility of the REIT’s operating asset but without being affected by the general stock market risks. Regarding the forward price–discovery function, investors should collect information not only from the spot market but also, maybe primarily, from the derivative market.
Originality/value
In this paper, we use a never-exploited database that is relative to the quotes of the UK IPD swaps. It is the first attempt to analyze the statistical characteristics of their changes. Our results show that these prices are clearly superior to the spot series, in terms of risks but without behaving affected by the tyranny of the past values. These findings may conduct to consider new methods to unsmooth current real estate indices. Characterized by a strong sensitivity to the changes in the information set, property derivative-based indicators should lead to increased efficiency in the spot market.
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Philip Gregorowicz and H. Dean Moberly
Agricultural markets for commodities have tended to be unstable with high variability in prices received by producers from year‐to‐year. These conditions have always made…
Abstract
Agricultural markets for commodities have tended to be unstable with high variability in prices received by producers from year‐to‐year. These conditions have always made production planning very risky over time. For this reason and others, since 1933, the federal government has supported commodity prices in one fashion or another at or near break even. Support programs have put pressure on the annual federal deficits and subsequently have added to the national debt. This paper investigates the use of private agricultural options contracts as a price risk management tool. Use of put options was compared for four commodities to the use of forward pricing, the use of cash prices at harvest and the use of futures as commodity pricing strategies. Private put options were found to be a useful alternative to the use of government prices upports in some commodity situations. The paper suggests that the use of option contracts provides additional flexibility in price risk management and in dealing with uncertainty. This knowledge was found to be especially useful in light of current cuts in federal price supports in current federal budgeting activity.
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The greatest revolution in financial management over the last 20 years must be the growth in the use of derivative securities. We can also consider this area to be part of the…
Abstract
The greatest revolution in financial management over the last 20 years must be the growth in the use of derivative securities. We can also consider this area to be part of the much larger concept of financial engineering. Limited in their use for many years, innovative financial institutions have now introduced derivatives of every colour and flavour. Principal driving forces in this growth have been:
Mari Olander and Andreas Norrman
This paper aims to study an advanced third/fourth party logistics (3/4PL) relationship in which the logistics service provider extended normal services by taking ownership of the…
Abstract
Purpose
This paper aims to study an advanced third/fourth party logistics (3/4PL) relationship in which the logistics service provider extended normal services by taking ownership of the goods during global distribution. It also aims to describe and analyze the approach to the legal rules a 3/4PL provider and its client company took in their contract, and present some remarks on the extent to which these contract solutions are legally sound.
Design/methodology/approach
A cross‐functional (business law and logistics) approach is applied to a single case study. The main data source is a written contract, complemented by in‐depth interviews with the 3/4PL's managing director. A legal analysis is made from four perspectives of non‐mandatory and mandatory commercial legal rules.
Findings
Issues between the offered service, the legal function and reaction in contracts are pointed out, e.g. doubts regarding the legal risk of sales uncertainty, the ownership of goods, the product liability, and the roles as commercial agent and as freight forwarding agent. These kinds of advanced logistics services are not clearly handled, e.g. in the standard‐form contracts for freight forwarding.
Research limitations/implications
The research is limited to one case and to some aspects of Swedish commercial law, but put in an international perspective. It adds a legal perspective to previous studies on 3/4PL contracts, and it contributes to legal research by its analysis of how firms in real life react to law in their contracts.
Practical implications
Practitioners can get inspiration from an innovative logistics service setup, but also realize what legal challenges to consider when they make their contracts. A tentative approach to aligning logistics' and lawyers' work is suggested.
Originality/value
The paper combines legal and logistics research, and description/analysis of a 3/4PL case where ownership of the goods is transferred to the service provider.
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