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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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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?

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.

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 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.

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.

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.

This paper provides a review of research on financial derivatives, with an emphasis on and comprehensive coverage of research published in 15 top accounting journals from 1996 to 2017. We begin with some brief institutional details about derivatives and then summarize studies explaining when and why firms use derivatives. We then discuss the evolution of the accounting rules related to derivatives (and associated disclosure requirements) and studies that examine changes in these requirements over the years. Next, we review the literature that examines the consequences of firms’ derivative use to various capital market participants (i.e., managers, analysts, investors, boards of directors, etc.), with an emphasis on the role that the accounting and disclosure rules play in such consequences. Finally, we discuss the importance of industry affiliation on firms’ derivative use and the role that industry affiliation plays in derivatives research. Overall, our review suggests that, perhaps due to their inherent complexity and data limitations, derivatives are relatively understudied in accounting, and we highlight several areas where future research is needed.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

This paper aims to provide an update to the risk management literature, as it compiles a survey of 65 recent theoretical and empirical studies on the topic.

This is a survey paper that summarizes recent theoretical and empirical research regarding the relationship between risk management and firm value.

Recent empirical evidence provides support for theoretical propositions in the literature that risk management increases firm value and returns, while reducing return and cash flow volatility. The results are largely consistent with early findings, and there have been significant empirical advances that address concerns regarding the endogeneity of risk management practices relative to corporate financial decisions. The literature has become broader and deeper, as there are now studies with larger sample sizes across more industries and geographic areas.

Firms that use sound risk management practices obtain higher valuations, achieve better financial performance and experience diminished costs of financial distress. Recent research has emerged regarding enterprise risk management and its potential for value creation and risk reduction.

The paper provides a new compilation and synthesis of recent theoretical and empirical research in risk management that addresses many of the limitations of prior research.

Exposure risk managers can hedge exchange rate risk with either currency futures or currency options. It is generally suggested that hedgers should choose a hedge instrument that matches the risk profile of the underlying currency position as closely as possible. This advice, however, ignores the possibility that the hedging effectiveness may differ for the alternate risk management tools. This study compares the effectiveness of currency futures and currency options as hedging instruments for covered and uncovered currency positions. Based on Ederington's portfolio theory of hedging, the results show that currency futures provide the more effective covered hedge, while currency options (used to construct a synthetic futures contract) are more effective for an uncovered hedge. Hence, exposure risk managers do not have to sacrifice hedging effectiveness to obtain the desired risk profile. Corporations engaged in international business transactions are commonly exposed to exchange rate risk. Since management is concerned with currency exposure, it can hedge the anticipated exchange rate risk either with futures or options. The choice of the appropriate hedging tool is generally influenced by the type of currency exposure (transaction, translation, or economic risk), the size of the firm, the industry effect, the risk preference of the manager or the firm and his/her familiarity with the available financial instruments and techniques. It is also suggested that a hedger should choose a hedge instrument that matches the risk profile of the underlying currency position as closely as possible. Hence, futures contracts are more suitable for covered hedges, while option contracts are best used for uncovered hedges. Hedging effectiveness of these two hedge instruments must be considered as well in order to evaluate the cost of obtaining the desired risk profile. Some empirical research has shown that the futures contract provides both an appropriate risk profile and a more effective hedge than an options contract for covered positions. If these findings also hold for uncovered currency positions, then the hedging decision involves a trade‐off between the desired risk profile and hedging effectiveness. That is, a hedger would have to decide whether the extra risk protection afforded by the attractive risk profile of options is worth the loss in hedging performance. This study compares the hedging effectiveness of currency futures and currency options for both covered and uncovered positions. Ederington's risk‐minimizing approach is applied to estimate the hedging effectiveness and the least risk hedge ratios which, in turn, are used to assess the trade‐off between risk profile and hedging performance.