Post Asian financial crisis : a survey of Thai hedging practices

This thesis examines how companies in Thailand coped with exchange rate volatility post Asian Financial Crisis. Findings indicate businesses quickly adjusted to the transition from a fixed to floating regime. However, Thai businesses appear to be less rigorous in their internal control of currency hedging activities. The thesis recommends strategies to overcome this risk.

Low-frequency volatility of yen interest rate swap market in relation to macroeconomic risk

Using ‘low-frequency’ volatility extracted from aggregate volatility shocks in interest rate swap (hereafter, IRS) market, this paper investigates whether Japanese yen IRS volatility can be explained by macroeconomic risks. The analysis suggests that this low-frequency yen IRS volatility has strong and positive association with most of the macroeconomic risk proxies (e.g., volatility of consumer price index, industrial production volatility, foreign exchange volatility, slope of the term structure and money supply) with the exception of the unemployment rate, which is negatively related to IRS volatility. This finding is fairly consistent with the argument that the greater the macroeconomic risk the greater is the use of derivative instruments to hedge or speculate. The relationship between the macroeconomic risks and IRS volatility varies slightly across the different swap maturities but is robust to alternative volatility specifications. This linkage between swap market and macroeconomy has practical implications since market makers and hedgers use the swap rate as benchmark for pricing long-term interest rates, corporate bonds and various other securities.

An examination of Australian gold mining firms' exposure over the collapse of gold price in the late 1990s

Purpose – The purpose of this study is to examine the exposures of Australian gold mining firms in the highly volatile period from 1995 to 2000. This period has been characterized by significant changes in gold price due to bulk sale of gold by collective central banks. Specifically, the paper aims to investigate several firm-specific factors that are hypothesized to carry substantial influence on gold beta.

Design/methodology/approach – To estimate gold beta, we use the following multifactor model: R_g,_t = a+ß_gGPR_t + ß_xFXR_t + ß_mR_m,_t + _Et , where R_g,_t is the return on the gold stock Index at time t, GPR_t is the gold price return denominated in US dollar at time t, FXR_t is the foreign exchange return of Australian dollar in terms of US dollar at time t, R_m,t is the market return at time t, and _Et is the random error term at time t.

Findings – The paper finds that the values of gold beta are consistently greater than one, implying the sensitive nature of firms’ stock returns to gold price changes. This also suggests that investors holding gold mining stock would receive higher percentage increases in stock returns from a percentage increase in gold price returns, as opposed to investors holding gold bullion. Furthermore, these values have changed substantially over time with significant changes in gold price volatility. The most important and consistent relationship that we find is the impact of firms’ hedging behavior on their respective gold betas. This is consistent with Tufano’s study. It implies that firms, which hedge a greater proportion of their gold reserves, are less sensitive to movements in gold prices. The finding therefore supports the risk management theory that hedging increases shareholder’s wealth. However, cash operating costs, cash reserves and the level of gold production seem to influence very little on the firms’ exposure to gold price changes.

Originality/value – This study is of interest and important to the stock mining companies and investors because the extent of the effect of gold price movements on the stock returns of gold mining companies has significant impacts on returns for both firms and investors especially in their risk management and investment decisions, respectively.

Does a currency union provide the answer?

Reviews the history of NZ's foreign exchange policy, explains how floating exchange rates work and considers the performance of the NZ dollar over the last 15 years. Discusses the effects of a volatile currency on exporters, particularly of agricultural products, and whether currency union with Australia is a suitable solution to the problem.

Thai hedging practices post-Asian financial crisis

This paper provides survey evidence captured from a sample of 113 respondents to a 2008 questionnaire sent to 344 companies in Thailand. The study examines Thai hedging practices following the Asian Financial Crisis of 1997. Thai companies, like their international counterparts, rely predominantly on matching and forward contracts to hedge transaction exposure. Thai companies, however, appear to be less rigorous when it comes to internal control and supervision of derivative activity. It is recommended that Thai companies improve their risk management practices by putting into place a documented hedging policy, which includes a requirement that senior staff be actively engaged in the risk management activities of the firm.

Credit cycle dependent spread determinants in emerging sovereign debt markets

We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.

Institutional reform and export competitiveness of central and Eastern European economies

Following their political and economic independence in 1989, a group of ten Central and Eastern European countries (CEEs) embarked on major institutional reforms to modernise their economies in order to become an integral part of the global economy. This chapter provides an overview of the main institutional reforms undertaken in the CEEs and their effects on export competitiveness. The chapter focuses on selected meso and macro institutional reforms, namely price liberalisation, competition policy, trade and foreign exchange, privatisation, and corporate governance. The results show that institutional reforms in the CEEs were rapid and generally successful. All CEEs became members of the European Union (EU) and the World Trade Organization (WTO). Institutional reforms contributed significantly to improved efficiency and growth in the export sector. The results also suggest that further reforms are needed to improve competition policy and corporate governance, both of which are still below the standards found in Western industrialised countries.

The Power of words: Central bank communication and currency markets.

This thesis investigates the effect of central banks communication on exchange rates. It is found that Bank of Canada speeches had a dampening effect on the Canadian dollar exchange rate while Reserve Bank of Australia speeches did not have an impact on the Australian dollar exchange rate.

Exchange rate exposure, foreign currency derivatives and the introduction of the euro: French evidence

We investigate the impact of the introduction of the Euro on exchange rate exposures for French corporations and examine the corporate use of foreign currency derivatives to hedge exchange rate exposure post-Euro. Our findings indicate that the introduction of the Euro is associated with both a reduction in the number of firms that have significant exchange rate exposure and the absolute size of exposure. Consistent with these reduced exposures, French firms use foreign currency derivatives less intensively. Furthermore, the use of foreign currency derivatives is found to be associated with lower exchange rate exposure but there is insufficient evidence that these instruments are more effective in the post-Euro environment.

Foreign debt and financial hedging : evidence from Australia

We investigate the role of foreign currency denominated debt (FCDD) as a natural hedging instrument using a sample of Australian firms. Our results show that the incidence of foreign debt use among industrial sector firms is associated with a lower level of exchange rate exposure. The practice of issuing foreign debt within the industrial sector also conforms better to the hypothesis that firms do so to satisfy a demand for hedging. In contrast, although the incidence of foreign debt issues is higher in the resource/mining sector, the underlying motive for such arises from a demand for financing.

A model of the Australia-US exchange rate

This paper develops a model of exchange rate determination within an error correction framework. The intention is to identify both long and short term determinants that can be used to forecast the AUD/US exchange rate. The paper identifies a set of significant variables associated with exchange rate movements over a twenty year period from 1984 to 2004. Specifically, the overnight interest rate differential, Australia's foreign trade-weighted exposure to commodity prices as well as exchange rate volatility are variables identified that are able explain movements in the AUDIUS dollar relationship. An error correction model is subsequently constructed that incorporates an equilibrium correction term, a short-term interest rate differential variable, a commodity price variable and a proxy for exchange rate volatility. The model is then used to forecast out of sample and is found to dominate a naIve random walk model based on three different metrics.