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Article

Kashi Khazeh and Robert C. Winder

This study compares the effectiveness of money market hedges and options hedges for both payables and receivables denominated in British pounds, German marks, Japanese yen…

Abstract

This study compares the effectiveness of money market hedges and options hedges for both payables and receivables denominated in British pounds, German marks, Japanese yen and the Swiss franc. Data on interest rates, exchange rates, and options contracts were obtained from public sources for two recent time periods. This information was used to determine, for each currency: 1) the lowest rate of exchange for payables, and 2) the highest rate of exchange for receivables for each hedging technique. Unique “money market hedge exchange rate factors” and “options hedge exchange rate factors” were developed to facilitate comparisons between the two hedging techniques.

Details

Multinational Business Review, vol. 14 no. 1
Type: Research Article
ISSN: 1525-383X

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Book part

Donald Lien and Mei Zhang

A futures contract may rely upon physical delivery or cash settlement to liquidate open positions at the maturity date. Contract settlement specification has direct…

Abstract

A futures contract may rely upon physical delivery or cash settlement to liquidate open positions at the maturity date. Contract settlement specification has direct impacts on the behavior of the futures price, leading to different effects of liquidity risk on futures hedging. This chapter compares such effects under alternative settlement specifications with a simple analytical model of daily price change. Numerical simulation results demonstrate that capital constraint reduces hedging effectiveness and tends to produce a lower optimal hedge ratio. As the futures contract proceeds toward the maturity date, hedgers will take larger hedge position in order to achieve better hedging effectiveness. Finally, optimal hedge ratios are higher (resp. lower) under cash settlement for the bivariate normal (resp. lognormal) assumptions, whereas hedging effectiveness is almost always greater under cash settlement.

Details

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

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Article

MARK H.A. DAVIS, WALTER SCHACHERMAYER and ROBERT G. TOMPKINS

This article discusses static hedges for installment options, which are finding broad application in cases where the option‐buyer may reduce up‐front premium costs via…

Abstract

This article discusses static hedges for installment options, which are finding broad application in cases where the option‐buyer may reduce up‐front premium costs via early termination of an option. An installment option is a European option in which the premium, instead of being paid up front, is paid in a series of installments. If all installments are paid, the holder receives the exercise value, but the holder has the right terminate payments on any payment date, in which case the option lapses with no further payments on either side. The authors summarize pricing and risk management concepts for these options, in particular, using static hedges to obtain both no‐arbitrage pricing bounds and very effective hedging strategies with almost no vega risk.

Details

The Journal of Risk Finance, vol. 3 no. 2
Type: Research Article
ISSN: 1526-5943

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Article

Zachary Alexander Smith and Muhammad Zubair Mumtaz

The purpose of this paper is to examine whether there is significant evidence that hedge fund managers engage in deceptive manipulation of their reported performance results.

Abstract

Purpose

The purpose of this paper is to examine whether there is significant evidence that hedge fund managers engage in deceptive manipulation of their reported performance results.

Design/methodology/approach

A model of hedge fund performance has been developed using standard regression analysis incorporating dependent lagged variables and an autoregressive process. In addition, the extreme bounds analysis technique has been used to examine the robustness and sensitivity of the explanatory variables. Finally, the conditional influence of the global stock market’s returns on hedge fund performance and the conditional return behavior of the Hedge Fund Index’s performance have been explored.

Findings

This paper begins by identifying a model of hedge fund performance using passive index funds that is well specified and robust. Next, the lag structure associated with hedge fund returns has been examined and it has been determined that it seems to take the hedge fund managers two months to integrate the global stock market’s returns into their reported performance; however, the lagged variables were reduced from the final model. The paper continues to explore the smoothing behavior by conditioning the dependent lagged variables on positive and negative returns and find that managers are conservative in their estimates of positive performance events, but, when experiencing a negative result, they seem to attempt to rapidly integrate that effect into the return series. The strength of their integration increases as the magnitude of the negative performance increases. Finally, the performance of returns for both the Hedge Fund Index and the passive indices were examined and no significant differences between the conditional returns were found.

Research limitations/implications

The results of this analysis illustrate that hedge fund performance is not all that different from the performance of passive indices included in this paper, although it does offer investors access to a unique return distribution. From a management perspective, we are reminded that we need to be cautious about hastily arriving at conclusions about something that looks different or feels different from everything else, because, at times, our preconceived notions will cause us to avoid participating in something that may add value to our organizations. From an investment perspective, sometimes having something that looks and behaves differently from everything else, improves our investment experience.

Originality/value

This paper provides a well-specified and robust model of hedge fund performance and uses extreme bounds analysis to test the robustness of this model. This paper also investigates the smoothing behavior of hedge fund performance by segmenting the returns into two cohorts, and it finds that the smoothing behavior is only significant after the hedge funds produce positive performance results, the strength of the relationship between the global stock market and hedge fund performance is more economically significant if the market has generated a negative performance result in the previous period, and that as the previous period’s performance becomes increasingly negative, the strength of the relationship between the Hedge Fund Index and the global stock market increases.

Details

Chinese Management Studies, vol. 11 no. 3
Type: Research Article
ISSN: 1750-614X

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Article

Fabio Filipozzi and Kersti Harkmann

This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds.

Abstract

Purpose

This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds.

Design/methodology/approach

The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach.

Findings

The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies.

Originality/value

The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

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Article

Thomas O’Brien

The purpose of this paper is to present scenarios of interactive trilateral foreign exchange (FX) exposure, where a company’s exposures to two foreign currencies depend on…

Abstract

Purpose

The purpose of this paper is to present scenarios of interactive trilateral foreign exchange (FX) exposure, where a company’s exposures to two foreign currencies depend on those currencies’ FX rate with each other.

Design/methodology/approach

A pro forma analysis of three-way FX rate changes illustrates interactive trilateral FX exposure and generates observations for a multivariate regression estimation of FX exposure coefficients.

Findings

The multivariate regression estimates of FX exposure provide the basis for a useful financial hedging strategy for interactive trilateral FX exposure. Some of the FX exposure estimates have surprising signs and magnitudes.

Research limitations/implications

Scenario analysis does not result in a general theory of interactive FX exposure, but the study’s diverse and rich scenarios may provide helpful insights to theoretical and empirical researchers.

Practical implications

The scenarios relate to many common real-world situations and thus may help managers and educators better understand how to manage FX exposure.

Originality/value

The topic of interactive FX exposure is under-researched and under-covered in contemporary textbooks or the applied finance literature.

Details

Managerial Finance, vol. 45 no. 7
Type: Research Article
ISSN: 0307-4358

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Article

Ghaleb Rabab'ah

The study aims to investigate how and why hedges are used in nursing and education academic research articles and find out whether there are differences between the two…

Abstract

Purpose

The study aims to investigate how and why hedges are used in nursing and education academic research articles and find out whether there are differences between the two disciplines in using hedges and their subcategories.

Design/methodology/approach

The realization of hedges in 50 academic articles representing both disciplines, namely education and nursing, was scrutinized and analyzed.

Findings

The study reveals that there are significant differences between the nursing and education writers' use of hedging in the total use of hedging devices and their subcategories, in favor of the education discipline. This indicates that writers of education articles use hedges more frequently than the writers of nursing articles. In support of previous literature, it concludes that hedging devices are used as communicative strategies to qualify writers' commitment, reduce the force of the researchers' statements, express probability, save the writers' face, persuade readers, and avoid any possible rejection of their statements.

Research limitations/implications

The study was limited to 50 research articles representing both disciplines: education (non-scientific genre) and nursing (scientific genre), and certain hedging devices and their subcategories.

Practical implications

The study recommends that a clear awareness of the pragmatic effect of hedges and the ability to recognize them in texts is crucial to the acquisition of rhetorical competence in any discipline.

Originality/value

Despite the significance of hedging and the extensive research conducted on hedging, no studies have been conducted on nursing and education academic research articles to see how and why hedges are used in these two disciplines. The results can add to the existing literature that this rhetorical strategy is used differently in different disciplines and make an important contribution to the understanding of the practical reasoning and persuasion in nursing and education.

Details

Education, Business and Society: Contemporary Middle Eastern Issues, vol. 6 no. 3/4
Type: Research Article
ISSN: 1753-7983

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Article

Roland Füss and Frank Herrmann

This study presents an investigation of the long and short‐term co‐movements between different hedge fund strategy indices and the stock markets of France, Germany, Japan…

Abstract

This study presents an investigation of the long and short‐term co‐movements between different hedge fund strategy indices and the stock markets of France, Germany, Japan, North America and the UK. To analyse relationships among these price indices, the EngleGranger methodology, based on bivariate testing for cointegration, and correlation analysis are conducted. The question of long‐term dependence instead of short‐term consideration is of particular interest, because portfolio optimization is based upon the cointegration of prices, rather than the correlation of returns. However, as is generally known, there is an information loss when returns are used instead of prices. Results indicate that there exists no station ary, long‐term relationship between the two as set groups. The overall suggestion is that opportunities exist to diversify an international portfolio by taking hedge funds into account. Moreover, this applies not only in terms of a limited time period, but also in the long‐run. Besides this main result, the augmented Dickey‐Fuller test statistics for cointegration residuals show quite different behaviour in comparison to the correlation co efficients. The values of the test statistics show that there seems to be a weaker tendency towards long‐term interrelation between hedge fund strategies and the US stock market. This applies even though average correlation co efficients among these assets exceed those of other combinations between stock and hedge fund indices.

Details

Managerial Finance, vol. 31 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

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Abstract

Details

Understanding Financial Risk Management, Second Edition
Type: Book
ISBN: 978-1-78973-794-3

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Article

Damir Tokic

The purpose of this paper is to explain the theory of speculation to corporate executives. It is important that corporate hedgers understand how bubbles develop to…

Abstract

Purpose

The purpose of this paper is to explain the theory of speculation to corporate executives. It is important that corporate hedgers understand how bubbles develop to effectively adjust their corporate hedging strategies. Since excess speculation is always the primary cause of all bubbles, it is mandatory that corporate executives understand the basics of speculation theory.

Design/methodology/approach

The paper uses the case of Southwest Airlines to illustrate how corporate hedging programs can fail in an environment of asset price bubbles. Further, it reviews key academic theoretical articles on speculation, with emphasis on applied concepts.

Findings

Corporate hedgers must recognize inflating bubbles and acknowledge the positive feedback trading. Corporate hedgers must refrain from becoming the positive feedback traders themselves. Corporate hedgers can hedge the speculative bubbles by having insurance in form of options against potential bubbles at all times.

Originality/value

The paper can be a valuable reference source for corporate managers with diverse educational and business backgrounds because it widely disseminates the theory that only the closed circle of the trading community and narrowly specialized researches practice and fully understand.

Details

Journal of Management Development, vol. 31 no. 8
Type: Research Article
ISSN: 0262-1711

Keywords

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