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1 – 10 of over 9000PHILIP 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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Praveen Bhagawan M. and Jijo Lukose P.J.
Theoretical studies suggest that hedging helps firms to reduce their financial distress costs and underinvestment problem especially if the markets are imperfect. Hence hedging…
Abstract
Purpose
Theoretical studies suggest that hedging helps firms to reduce their financial distress costs and underinvestment problem especially if the markets are imperfect. Hence hedging, through the use of currency derivatives, is one of the important financial policies for firms. The purpose of this paper is to empirically examine the determinants of derivatives usage by Indian firms using financial disclosures on currency derivatives by non-financial constituents of S&P CNX 500 for 2009.
Design/methodology/approach
We manually collect the data on foreign currency derivatives from firms’ annual reports for 2009 and then follow Haushalter’s (2000) approach to examine the determinants of firms’ decision to hedge. A firm can make its hedging decision at once, deciding whether to hedge and how much to hedge. Given the nature of dependent variable that is censored, it is appropriate to use Tobit regression. A firm can also decide its hedging decision in two steps by deciding first on whether to hedge and later how much to hedge. The former is modelled by probit regression and later by conditional regression.
Findings
Our empirical evidence suggests that forwards are the main instruments for managing currency risk followed by options and swaps. The objectives, in the order of priority, are reduction in exposure associated with foreign currency receivables, foreign currency long-term loans and foreign currency payables. Firm’s decision to hedge is positively related to size, foreign exchange exposure and leverage, while negatively related to liquidity and investment opportunities. We find evidence of higher derivative usage by firms with both higher currency risk and higher financial distress costs.
Practical implications
The findings of this paper will help corporates, researchers and regulators to understand firms’ motives behind hedging.
Originality/value
This is the first empirical study that examines the determinants of firm’s decision to hedge and the extent of hedging in the context of emerging economies like India.
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Oktavia Oktavia, Sylvia Veronica Siregar, Ratna Wardhani and Ning Rahayu
The purpose of this paper is to examine the effect of financial derivatives usage and country’s tax environment characteristics on the relationship between financial derivatives…
Abstract
Purpose
The purpose of this paper is to examine the effect of financial derivatives usage and country’s tax environment characteristics on the relationship between financial derivatives and tax avoidance.
Design/methodology/approach
This study uses a cross-country analysis with the scope of ASEAN (Association of Southeast Asian Nations) countries which consists of the Philippines, Indonesia, Malaysia, and Singapore.
Findings
The level of financial derivatives usage positively affects the level of tax avoidance. This finding indicates that financial derivatives can be used as tax avoidance tool. Furthermore, the positive effect of the level of financial derivatives usage on the level of tax avoidance is lower in countries with a competitive tax environment than in countries with an uncompetitive tax environment. This finding indicates that in country with a competitive tax environment, the use of financial derivatives as a tax avoidance tool can be replaced by the tax facilities provided by that country.
Research limitations/implications
This study uses four countries in the Association of Southeast Asian Nations region and does not test the sample based on the financial derivative types.
Practical implications
Tax authorities need to establish a clear tax regulation in regard to the tax treatment of financial derivatives transactions, e.g. define the definition of financial derivatives for hedging purposes and financial derivatives for speculative purposes; and define specific criteria to separate financial derivatives for hedging purposes from financial derivatives for speculative purposes. It is necessary to determine whether losses arising from derivative transactions are classified as deductible expenses or non-deductible expenses.
Originality/value
To the best of the authors’ knowledge, this study is also the first that provide empirical evidence that the relationship between financial derivatives and tax avoidance activities depends on a country’s tax environment.
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Muhammad Rizky Prima Sakti, Ahmad Syahid, Mohammad Ali Tareq and Akbariah Mohd Mahdzir
The purpose of this study is to investigate shari’ah scholars’ views and experiences pertaining the shari’ah issues, challenges and prospects in Islamic derivatives. Specifically…
Abstract
Purpose
The purpose of this study is to investigate shari’ah scholars’ views and experiences pertaining the shari’ah issues, challenges and prospects in Islamic derivatives. Specifically, this paper critically examines the criticisms toward conventional derivative instruments and the controversies surrounding underlying contracts and current Islamic derivative products.
Design/methodology/approach
This study uses qualitative methods to form a deeper understanding of shari’ah scholars’ perception and experience on Islamic derivatives. Semi-structured interviews were conducted with five shari’ah scholars who are currently working in Islamic financial institutions in Malaysia and Singapore. This study used phenomenological techniques for its data analysis.
Findings
This study has found that shari’ah scholars are aware of the shari’ah issues surrounding Islamic derivatives and have provided comprehensive insight on the solution to these issues. It was found that it is important to take into account the derivatives instruments in Islamic financial industry because of the need for hedging and risk mitigation within Islamic financial institutions. Nonetheless, the study has also found that the use of wa’ad contracts to structure Islamic profit rate swaps and foreign currency exchanges are problematic because of it having features of bay’ al-kali’ bil-kali (the sale of one debt for another).
Originality/value
This study is one of few studies that highlight the shari’ah issues of Islamic derivatives in Islamic banking and finance industry. This paper is of value in discussing risk management and Islamic derivatives in Islamic financial institutions and how there are many issues under the investigation process, particularly issues related to controversial underlying contracts and products.
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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 years…
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.
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Tom Aabo, Jochen Kuhn and Giovanna Zanotti
The purpose of this study is to explore the influence of founder families in medium‐sized manufacturing firms and to investigate the impact of such influence on risk management …
Abstract
Purpose
The purpose of this study is to explore the influence of founder families in medium‐sized manufacturing firms and to investigate the impact of such influence on risk management – more specifically foreign exchange hedging and speculation.
Design/methodology/approach
This empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares/ordered regression analysis.
Findings
The authors find that two thirds of medium‐sized manufacturing firms are founder family firms in which the founder of the firm or members of his/her family are active in the management team, are members of the board of directors, and/or are shareholders of the firm. The study finds no difference between such founder family firms and other firms in terms of the use/non‐use decision related to foreign exchange derivatives but a marked difference in terms of the extent decision. Thus, founder family firms tend not only to hedge but also to speculate more extensively than other firms.
Research limitations/implications
The findings are based on medium‐sized manufacturing firms in Denmark.
Originality/value
This study provides empirical evidence on the influence of founder families in medium‐sized firms and adds to the sparse literature on the impact of founder family influence on risk management.
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Thomas Kim and Li Sun
Using a sample of oil and gas firms in the USA, the study examines the relation between the presence of hedging and annual report readability.
Abstract
Purpose
Using a sample of oil and gas firms in the USA, the study examines the relation between the presence of hedging and annual report readability.
Design/methodology/approach
The authors use regression analysis to examine the relation between the presence of hedging and annual report readability.
Findings
The authors find that annual reports of firms with the use of hedging are less readable (i.e. difficult to read and understand). The authors also find that the primary results are more pronounced for firms with a higher level of business volatility.
Originality/value
The study contributes to the finance literature on the use and value of hedging and to the accounting literature on the determinants of annual report readability. The Securities and Exchange Commission (SEC) has persistently asked companies to improve the readability of their disclosures to stakeholders (SEC, 1998; 2013, 2014). Hence, the study not only identifies a potential determinant (i.e. hedging) that may influence the level of readability but also supports the current regulatory policy by the SEC, which is encouraging companies to improve readability.
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Milagros Vivel‐Búa, Luis Otero‐González, Sara Fernández‐López and Pablo Durán‐Santomil
Using hedging theories, we analyse the variables that determine the decision to hedge with foreign currency debt.
Abstract
Purpose
Using hedging theories, we analyse the variables that determine the decision to hedge with foreign currency debt.
Design/methodology/approach
Using a sample of 100 Spanish companies with a significant social and economic role in Latin American during 2004‐2007, we estimated probit models for panel data.
Findings
Our results showed that the main determinants are scale economies and the use of derivatives. On the one hand, we found that this hedging is positively related to tax loss carry‐forwards and long‐term economic sectors, and on the other, that it is related negatively to information asymmetries and growth opportunities. Results were mixed for foreign currency exposure.
Research limitations/implications
The limitations of this paper are associated to the availability of information from annual reports and the SABI database, especially the variables in relation to operational hedging. Therefore, as a future line of research, we propose gathering of data on these internal hedging practices in order to obtain more accurate evidence about its use in companies and their relationship with financial hedging.
Originality/value
This paper makes three major contributions to the existing literature. First, it contributes by illustrating currency hedging practices used by Spanish firms – which are important in Latin markets – to manage exchange rate exposure in. Second, we used more variables for the empirical analyses to contrast the hedging theories than previous studies had. Finally, we used a data panel because it allows the control of unobservable heterogeneity and endogeneity problems. Previous studies only used cross‐section estimations.
Objetivo
Este trabajo analiza la cobertura cambiaria con deuda en divisa utilizando las teorías de cobertura.
Diseño/metodología/aproximación
Se estimaron modelos probit para datos de panel usando una muestra de 100 empresas españolas con un papel económico‐social relevante en Latinoamérica durante el período 2004‐2007.
Resultados
Los resultados muestran que esta cobertura se relaciona principalmente con las economías de escala y el uso de derivados. Asimismo, existe una relación positiva con la convexidad impositiva y la localización empresarial en sectores orientados al largo plazo, y negativa con las asimetrías informativas y oportunidades de crecimiento. No existe evidencia concluyente para la exposición cambiaria.
Limitaciones de la investigación/implicaciones
La investigación tuvo como limitación la disponibilidad de algunos datos en los informes anuales de las empresas y la base de datos SABI, en especial, aquellos referidos a la cobertura operativa. En consecuencia, una línea de trabajo futura es la mejora de la información sobre esta cobertura, lo cual permitiría aportar mayor evidencia sobre su utilización y su relación con la cobertura financiera.
Originalidad/valor
Esta investigación realiza tres contribuciones a la literatura existente: a) permite un mejor conocimiento de la cobertura cambiaria en empresas españolas internacionales que ejercen un papel relevante en los mercados latinoamericanos; b) utiliza un conjunto de variables más amplio para contrastar las teorías de cobertura que el aplicado en estudios precedentes; c) emplea la metodología de datos de panel y no estimaciones en sección cruzada como presentan los trabajos previos, lo cual permite controlar la heterogeneidad inobservable y posibles problemas de endogeneidad.
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Minghua Ye, Rongming Wang, Guozhu Tuo and Tongjiang Wang
The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting risks in…
Abstract
Purpose
The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting risks in the futures market.
Design/methodology/approach
Based on data from spot and futures market in China, this paper develops an improved B-S model for the calculation of crop price insurance premium and tests the possibility of hedging underwriting risks by insurance firms in the futures market.
Findings
The authors find that spot price of crops in China can be estimated with agricultural commodity futures prices, and can be taken as the insured price for crop price insurance. The authors also find that improved B-S model yields better estimation of crop price insurance premium than traditional B-S model when spot price does not follow geometric Brownian motion. Finally, the authors find that hedging can be one good alternative for insurance firms to manage underwriting risks.
Originality/value
This paper develops an improved B-S model that is data-driven in nature. Insured price of the crop price insurance, or the exercise price used in the B-S model, is estimated from a co-integration model built on spot and futures market price series. Meanwhile, distributional patterns of spot price series, one important factor determining the applicability of B-S model, is factored into the improved B-S model so that the latter is more robust and friendly to data with varied distributions. This paper also verifies the possibility of hedging of underwriting risks by insurance firms in the futures market.
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Christina E. Bannier, Thomas Heidorn and Heinz-Dieter Vogel
This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime…
Abstract
Purpose
This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime crisis of 2007/2008 and, particularly, the European debt crisis 2009/2010 led to a differential development on corporate and sovereign CDS markets and investigates the primary use (speculative risk-trading or risk-hedging) of the two markets in recent years.
Design/methodology/approach
The authors use aggregate market data on the size of the respective markets and on the structure of market participants and their changes over time to assess the main research question. They enhance existing data from public sources such as the Bank for International Settlements and Depository Trust and Clearing Corporation with their own statistics on European sovereign CDS and combine their conclusions with observations regarding standardisation efforts and regulatory changes in the CDS market.
Findings
The authors show that after the subprime crisis 2007/2008 and the European debt crisis 2009/2010, the corporate and sovereign CDS markets developed quite differently. They provide evidence that since mid-2010, market participants started to use the sovereign CDS market more strongly for speculative purposes than for risk-hedging. This shows both in the shift of risk-quality of sovereign CDS contracts and in the changing structure of market participants. The ongoing standardisation and regulation in the CDS market – leading to further increases in transparency and reductions in transaction costs – may be expected to trigger a similar change also for corporate CDS.
Originality/value
Based on a broad variety of market infrastructure data, the authors show a diverging development of corporate and sovereign CDS markets in Europe in recent years. Particularly the sovereign CDS market appears to have shifted from a risk-hedging instrument to being used more strongly for speculative risk-trading. The authors combine their findings with recent regulatory action and market standardisation schemes and draw conclusions for the future development of CDS markets.
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