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.

Investigating the determinants of the decision to engage in a corporate hedging strategy

This paper investigates the decision to engage in a comprehensive corporate hedging strategy for Australian listed companies. Specifically the pursuit of a comprehensive hedging strategy is gauged by jointly investigating the corporate use of foreign currency derivatives; interest rate derivatives; commodity derivatives and foreign debt. The results show that firm size, leverage, dividend yield and block holdings are incentive factors to the comprehensive hedging decision, while executive shares is a disincentive factor. Consistent with hedging theory, the significance of the leverage variables supports the financial distress cost hypothesis. Support is also found for the dividend decision is a substitute for corporate hedging.

An evolutionary computing approach to minimize dynamic hedging error

The objective of our present paper is to derive a computationally efficient genetic pattern learning algorithm to evolutionarily derive the optimal rebalancing weights (i.e. dynamic hedge ratios) to engineer a structured financial product out of a multiasset, best-of option. The stochastic target function is formulated as an expected squared cost of hedging (tracking) error which is assumed to be partly dependent on the governing Markovian process underlying the individual asset returns and partly on
randomness i.e. pure white noise. A simple haploid genetic algorithm is advanced as an alternative numerical scheme, which is deemed to be
computationally more efficient than numerically deriving an explicit solution to the formulated optimization model. An extension to our proposed scheme is suggested by means of adapting the Genetic Algorithm parameters based on fuzzy logic controllers.

Economic linkages across commodity futures : hedging and trading implications

We investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation reveals short-run cross-market interaction between NR and GA, and from NR to PA. Cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our findings are robust to lag-specification, volatility measure, and consistent with full BEKK-GARCH estimation results. Further analysis, which benchmarks against silver futures market, TOCOM index and TOPIX transportation index, confirms that our results are driven by a common industry exposure, and not a commodity market factor. A simple trading rule that incorporates short-run GA and long-run PA dynamics to predict NR return yields positive economic profit. Our study offers new insights into how commodity and equity markets relate at an industry level, and implications for multi-commodity hedging.

Are firms hedging or speculating? The relationship between financial derivatives and firm risk

The focus of this article is an investigation of the relationship between the use of financial derivatives and firm risk using a sample of Australian firms. Our results suggest that this relationship is nonlinear in nature. Specifically, the use of financial derivatives is associated with a risk reduction for moderate derivative users. Derivative usage among extensive derivative users, on the other hand, appears to lead to an increase in firm risk. Nevertheless, compared to firms that do not make use of derivatives, there is no evidence that extensive derivative users are exposed to a risk level in excess of that of nonderivative users. The results are, therefore, indicative of a hedging motive behind the use of financial derivatives.

Thai hedging practices : post Asian financial crisis

This paper provides survey evidence captured from a sample of 113 respondents to a 2008 questionnaire that was sent to 344 listed non-financial companies in Thailand. The study examines how Thai companies manage their exchange rate exposure post Asian Financial Crisis.

Thailand is an interesting case study because it was a country at the core of the 1997 financial meltdown and was one of the first forced by the crisis to move from a fixed to a floating exchange rate regime. It is therefore constructive to examine how businesses in Thailand have coped with a shift from a fixed to floating exchange rate and to examine how they manage their exchange rate exposure post 1997.

Findings indicate that companies that use currency derivatives do so to reduce volatile cash flows are less risky and tend to be more profitable than companies that do not use currency derivatives. This is consistent with the theory that hedging increases the value of the firm.

The type of instruments that companies in Thailand use and how they are used is similar to what other studies find in other countries. Matching and the use of forward contracts are the most common ways that companies manage transaction exposure. The study also confirms that companies with higher levels of international business engagement are more likely to use currency derivatives.

What is unique in Thailand is that Thai businesses are less rigorous in their internal control of their currency hedging activities. It is therefore recommended that companies consider a documented hedging policy and that senior management actively monitor the policy and currency hedging activity.

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.

Dynamic currency hedging for international stock portfolios

The paper studies dynamic currency risk hedging of international stock portfolios using a currency overlay. A dynamic conditional correlation (DCC) multivariate GARCH model is employed to estimate time-varying covariance among stock market returns and currency returns. The conditional covariance is then used in the estimation of risk-minimizing conditional hedge ratios. The study considers seven developed economies over the period January 2002 to April 2010 and estimates daily conditional hedge ratios for portfolios of various stock market combinations. Conditional hedging is shown to dominate traditional static hedging and unconditional hedging in terms of risk reduction both in-sample and out-of-sample, especially during the recent global financial crisis. Conditional hedging also proves to consistently reduce portfolio risk for various levels of foreign investments.

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.

Effective derivative hedging and initial public offering long-run performance

We investigate the role of corporate currency risk management through the use of financial derivatives in influencing the long-run performance of a sample of Australian resources companies. We find that derivative users generally outperformed nonderivative users in the 5-year period following listing. Effective derivative users consistently outperformed the nonhedgers. Furthermore, within the population of derivative users, effective derivative users tended to perform better than ineffective hedgers. Our results indicate that effective financial risk management plays a role in long-run IPO performance.

Currency overlay for global equity portfolios : cross-hedging and base currency

The effectiveness of a currency overlay hedge for a global equity portfolio can be significantly affected by changes in the base currency. Base currency changes have no significant effect on the hedged portfolio risk; however, they may substantially increase or decrease risk relative to the unhedged position. Australian (AUD) and Canadian (CAD) forwards provide effective cross-hedging, particularly in combination with one or two other currency hedges. Hedge effectiveness is significantly improved by allowing for natural hedges via a dynamic approach that captures structural change and permits under-hedging of currency exposures. © 2014 Wiley Periodicals, Inc.

Intraday return predictability, portfolio maximisation, and hedging

We examine whether intraday Chinese return predictability is linked to optimal portfolio holding and hedging. We find that: (1) S&P500 futures returns only predict Chinese spot market returns in up to 5-minute of trading with predictability disappearing at higher frequencies of trade; (2) the portfolio weight is maximised at the 5-minute trading frequency, when predictability is the strongest; and (3) when predictability is the strongest, significantly less shorting of the futures is required to minimise risk when a long position is taken in the Chinese market.