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Article
Publication date: 17 July 2020

Sunghee Choi, Md. Abdus Salam and Youngshin Kim

The purpose of this paper is to investigate the effect of foreign currency derivative (FCD) usage on firm value. In specific, the authors study the significance of the…

Abstract

Purpose

The purpose of this paper is to investigate the effect of foreign currency derivative (FCD) usage on firm value. In specific, the authors study the significance of the relationship between FCD usage and firm value for exporters and non-exporters, respectively, with consideration of conditions of exchange rate movements.

Design/methodology/approach

As the main empirical test, this paper utilizes the multivariate Tobin's Q model for a panel dataset of 125 non-financial firms, which have been continuously listed on the Dhaka Stock Exchange from 2010–2018. The authors divide the sample firms into two groups: exporters and non-exporters based on theoretical background and estimate the relationship between FCD usage and the firm value measured by Tobin's Q for each firm group. Also, as a complementary test, the Fama–French three-factor model is used to estimate the effect of FCD usage on the monthly portfolio returns of the firms when exchange rate levels and volatility are considered.

Findings

First, the effect of FCD usage on firm value significantly exists in the Bangladeshi non-financial firms from 2010–2018. Specifically, the FCD effect on firm value is negative (hedging discount) for exporters, whereas the FCD effect is positive (hedging premium) for non-exporters. Second, the multivariate analyses suggest the hedging discount (premium) for exporters (non-exporters) is consistent only when the domestic currency appreciates (depreciates). Third, the FCD effect on firm value is consistently positive for non-exporters when exchange rate volatility is higher.

Research limitations/implications

Further studies could be conducted with the detailed data of the firms' hedging performance, if they are available. Particularly, the cost and revenue data associated with hedging would help identify evident reasons for exporters' hedging discounts in Bangladesh. Moreover, the best hedging option for maximizing the Bangladeshi firm value could be analyzed with the detailed FCD type data, such as futures, options and swaps. Further refinement of these data would improve institutional capability for substantive growth in frontier markers.

Practical implications

This paper provides practical implications for corporate managers in charge of managing foreign exchange risk in Bangladesh. First, closer accounting observation is much necessary for the firms to accurately evaluate whether the FCD usage is beneficial in their cash flows because the exporters come to have two large costs: entering foreign markets and carrying FCD program. Second, for better value from using FCDs, the exporters should learn how to utilize appropriate financial derivatives. FCD usage is beneficial when the exporters are fully aware of what their real risks are and the role of appropriate derivatives within its portfolio strategy.

Social implications

A policy reducing the costs of either foreign market entry or FCD usage would be helpful for lessening the FCD discount effect. Also, a long-term policy that enables the born-to-exporters to establish substantive positions in the home market would be helpful for enhancing the cash inflow capability, thereby causing the firm value structure to be strengthened.

Originality/value

The paper has originality because it bridges the gap in the literature. First, the authors find a new empirical result regarding the significant FCD effect on a frontier market, although the FCD effect deals with the small and secondary risk in the previous literatures. Second, finding the contrasting FCD effect between the exporters and non-exporters sheds lights on the importance of firm-specific characteristics for precisely evaluating the FCD effect on firm value. Third, we find that the significant FCD effect is prominent by condition of exchange rate movements, which has been overlooked in prior literature.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Book part
Publication date: 19 June 2019

Yayun Yan and Sampan Nettayanun

Our study explores friction costs in terms of competition and market structure, considering factors such as market share, industry leverage levels, industry hedging

Abstract

Our study explores friction costs in terms of competition and market structure, considering factors such as market share, industry leverage levels, industry hedging levels, number of peers, and the geographic concentration that influences reinsurance purchase in the Property and Casualty insurance industry in China. Financial factors that influence the hedging level are also included. The data are hand collected from 2008 to 2015 from the Chinese Insurance Yearbook. Using panel data analysis techniques, the results are interesting. The capital structure shows a significant negative relationship with the hedging level. Group has a negative relationship with reinsurance purchases. Assets exhibit a negative relationship with hedging levels. The hedging level has a negative relation with the individual hedging level. Insurers have less incentive to hedge because it provides less resource than leverage. The study also robustly investigates the strategic risk management separately by the financial crises.

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Article
Publication date: 14 May 2020

Nam Hoang and Terrance Grieb

This study aims to spot wheat data and disaggregated commitment of trader data for CME traded wheat futures to examine the effect of exogenous shocks for hedging positions…

Abstract

Purpose

This study aims to spot wheat data and disaggregated commitment of trader data for CME traded wheat futures to examine the effect of exogenous shocks for hedging positions of Producers and Swap Dealers on cash-futures basis and excess futures returns.

Design/methodology/approach

A Bayesian vector autoregression (BVAR) methodology is used to capture volatility transfer effects.

Findings

Evidence is presented that institutional short hedging positions play a major role in the pricing of asymmetric information held by Swap Dealers into the basis. The results also indicate that producer hedging contains information when conditions in the supply chain create a shift in long vs short hedging demand. Finally, the results demonstrate that that Swap Dealer short hedging has the greatest effect on risk premium size and historical volatility.

Originality/value

Various proxies for spot prices are used in the literature, although actual spot price data is not common. In addition, stationarity for basis and open interest data is induced using the Baxter-King filter which allows us to work with levels, rather than percentage changes, in the time series data. This provides the ability to directly observe the effect of outright open interest positions for hedgers on contemporaneous innovations in basis and in excess returns. The use of a BVAR methodology represents an improvement over other structural VAR models by capturing contemporaneous systemic effects within an endogeneity based structural framework.

Details

Studies in Economics and Finance, vol. 37 no. 3
Type: Research Article
ISSN: 1086-7376

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Book part
Publication date: 26 April 2011

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…

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.

Details

Research in Finance
Type: Book
ISBN: 978-0-85724-541-0

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Book part
Publication date: 4 March 2008

Melanie Cao and Jason Wei

Stock ownership and incentive options are used by companies to retain and motivate employees and managers. These grants usually come with vesting features which require…

Abstract

Stock ownership and incentive options are used by companies to retain and motivate employees and managers. These grants usually come with vesting features which require grantees to hold the assets for certain periods. This vesting requirement makes the grantee's total wealth highly undiversified. As a result, as shown by previous researchers, grantees tend to value these incentive securities below market. In this case, grantees will have a strong desire to hedge away the firm-specific risk. Facing the restrictions of direct hedges such as shorting the firm's stock, employees may implement a partial hedge by taking positions in an asset highly correlated with the firm's stock, such as an industry index. In this chapter, we investigate the effects of such a partial hedge. Using the continuous-time, consumption-portfolio framework as a backdrop, we demonstrate that the hedging index can enhance the employee's optimal portfolio holding and increase his intertemporal utility. Consequently, his private valuations of these grants are higher than that without the partial hedging. However, because the partial hedge makes the employee's total wealth less sensitive to the firm's stock price, it will also undermine the incentive effects. Therefore, the presumed incentive effects of these restricted assets should not be taken for granted.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-549-9

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Article
Publication date: 5 March 2018

Nafis Alam and Amit Gupta

The purpose of this paper is to examine if the hedging strategy of the firm adds value to the firm, and if so, is the source of the benefit consistent with the hedging theory?

Abstract

Purpose

The purpose of this paper is to examine if the hedging strategy of the firm adds value to the firm, and if so, is the source of the benefit consistent with the hedging theory?

Design/methodology/approach

The paper used data from 129 top non-financial Indian companies spanning a period of 2008-2015 and analyzed using the ordinary least squares regression technique.

Findings

The study finds that firms engaged in hedging compared to non-hedgers have less volatility in the firm’s value. The use of hedging during the financial crisis is found to be value enhancing for the hedgers. The results also found that some firms do not disclose the notional value of derivatives clearly, which highlights the need of clear regulation for derivative declaration in the annual reports.

Research limitations/implications

Research implications of this study are to gain an insight into the hedging effectiveness in the highly volatile Indian market as compared to developed countries. High volatility in the exchange rate of Indian rupee further makes it one of the most relevant markets to study the effect of hedging on the firm’s value.

Practical implications

Mostly hedging is done purely for risk management, and if managers try to time the market by selective hedging, it can bring a negative impact for the firm. Findings show that managers should manage their hedging strategy based on changing the economic environment and not purely on the firms’ financial value.

Originality/value

To the authors’ best knowledge, this is the first study to extract the dollar value of derivative usage of sample firms and analyze its effectiveness in enhancing firm value in the presence of other financial parameters. This will be an advancement of previous studies, which used hedging as a dummy variable only. Most studies on this topic are carried out in developed countries; there is a limited research on developing markets such as India, and past studies have been more generic one like determinants of hedging and overall derivative scenario.

Details

International Journal of Accounting & Information Management, vol. 26 no. 1
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 2 November 2012

Nadine Gatzert and Hannah Wesker

Systematic mortality risk, i.e. the risk of unexpected changes in mortality and survival rates, can substantially impact a life insurers' risk and solvency situation. By…

Abstract

Purpose

Systematic mortality risk, i.e. the risk of unexpected changes in mortality and survival rates, can substantially impact a life insurers' risk and solvency situation. By using the “natural hedge” between life insurance and annuities, insurance companies have an effective tool for reducing their net‐exposure. The purpose of this paper is to analyze this risk management tool and to quantify its effectiveness in hedging against changes in mortality with respect to default risk measures.

Design/methodology/approach

To achieve this goal, the paper models the insurance company as a whole and takes into account the interaction between assets and liabilities. Systematic mortality risk is considered in two ways. First, systematic mortality risk is modeled using scenario analyses and, second, empirically observed changes in mortality rates for the last 10‐15 years are used.

Findings

The paper demonstrates that the consideration of both the asset and liability side is vital to obtain deeper insight into the impact of natural hedging on an insurer's risk situation and shows how to reach a desired safety level while simultaneously immunizing the portfolio against changes in mortality rates.

Originality/value

The paper contributes to the literature by considering the insurance company as a whole in a multi‐period setting and taking into account both, assets and liabilities, as well as their interaction. Furthermore, the paper shows how to obtain a desired safety level while simultaneously immunizing a portfolio against changes in default risk.

Details

The Journal of Risk Finance, vol. 13 no. 5
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 15 March 2011

Erik Hofmann

Supply chain risks significantly endanger small and medium‐sized enterprise (SME‐) suppliers in different currency areas in purchasing and sales. The purpose of this paper…

Abstract

Purpose

Supply chain risks significantly endanger small and medium‐sized enterprise (SME‐) suppliers in different currency areas in purchasing and sales. The purpose of this paper is twofold: to describe the concept of natural hedging in supply chains, and to highlight the potentials of natural hedging as a risk prophylaxis and a supplier financing approach.

Design/methodology/approach

The paper uses a brief literature review and a conceptual research design, taking the financial and physical component of natural hedging (in this case between an OEM and its SME‐suppliers in the automotive industry) into consideration.

Findings

Natural hedging of currency and commodity price fluctuations can contribute to the reduction of SME‐suppliers' supply chain vulnerability, also benefiting an OEM.

Research limitations/implications

This research focuses exclusively on relationships between SME‐suppliers and large OEMs in the automotive industry. Studies of other types of companies and industries, such as the capital goods industry, might reveal divergent practices.

Practical implications

With the natural hedging approach, the paper promotes an innovative concept for better managing risks in supply chains, especially in recessionary times. The concept is a source for supplier financing.

Originality/value

This research shows that a globally active focal firm – an OEM in the automotive industry, for instance – can hedge currency and commodity price risks (financial components), as well as operational supply risks (physical components), by centralizing commodity supply with its SME‐suppliers. It can serve as a basis for future research.

Details

Supply Chain Management: An International Journal, vol. 16 no. 2
Type: Research Article
ISSN: 1359-8546

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Article
Publication date: 15 June 2010

Lieh‐Ming Luo and Her‐Jiun Sheu

The paper aims to evaluate the real research and development (R&D) options value through the proposed model that can jointly consider the two types of risk management…

Abstract

Purpose

The paper aims to evaluate the real research and development (R&D) options value through the proposed model that can jointly consider the two types of risk management activities, i.e. hedging risks and making use of risks. Hedging is an important risk‐management tool that can diversify R&D risk internally since R&D organizations cannot transfer technological risks to another entity by conventional loss financing methods. Making use of risks means R&D organizations can benefit from proactively managing risks, and then can create management‐flexibility value from the real option reasoning viewpoint.

Design/methodology/approach

Using the real options pricing approach, the paper provides an applicable assessment method for R&D projects that can jointly consider the aforementioned two types of risk management activities. The paper also investigates the value‐enhancing effects of R&D risk management activities via interviews survey and secondary data analyses in the pharmaceutical industry of Taiwan.

Findings

Through numerical analyses, the results indicate that the hedging management can serve to be effective mechanisms of risk reduction as well as value enhancement for R&D projects. Additionally, the value‐enhancing effect of hedging management is more significant for those R&D projects with even higher risk‐level. The results of empirical study also are consistent with the model prediction.

Originality/value

To achieve great performance of R&D risk management, R&D organizations need to implement both the types of risk management activities. By this real‐options valuation approach incorporating together those risk management activities, R&D projects portfolio can be evaluated adequately.

Details

Kybernetes, vol. 39 no. 5
Type: Research Article
ISSN: 0368-492X

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Article
Publication date: 20 April 2012

Chyi Lin Lee and Ming‐Long Lee

The hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent…

Abstract

Purpose

The hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent years, however few studies have been placed on this area. This study aims to fill in this gap and examine the hedging effectiveness of Australian and Japanese REIT futures over 2002‐2010.

Design/methodology/approach

The analysis of this study involves two stages. The first stage is to estimate optimal hedge ratios. A variety of hedging methods is employed, including a traditional hedge, an ordinary least squares (OLS) model and a bivariate GARCH model. Thereafter, the hedging effectiveness of these strategies is assessed individually.

Findings

The empirical results show REIT futures are effective hedging instruments in which a risk reduction of 37 per cent‐78 per cent (34 per cent‐52 per cent) for Australian (Japanese) REITs is evident. Importantly, the results also reveal that REIT futures outperform other hedging instruments in which a weaker risk reduction is found by stock, interest rate and foreign currency futures contracts. Moreover, the hedging effectiveness of REIT futures is dynamic and varies over time.

Practical implications

The findings enable more informed and practical investment decision‐making regarding the role of REIT futures in risk management.

Originality/value

This paper, as far as the authors are aware, is the first study to offer empirical evidence of the risk‐reduction effectiveness of REIT futures. The hedging effectiveness of REIT futures is also compared to other hedging instruments for the first time.

Details

Journal of Property Investment & Finance, vol. 30 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

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