Price Transmission and Effects of Exchange Rates on Domestic Commodity Prices via Offshore and Currency Hedging

The framework presents how trading in the foreign commodity futures market and the forward exchange market can affect the optimal spot positions of domestic commodity producers and traders. It generalizes the models of Kawai and Zilcha (1986) and Kofman and Viaene (1991) to allow both intermediate and final commodities to be traded in the international and futures markets, and the exporters/importers to face production shock, domestic factor costs and a random price. Applying mean-variance expected utility, we find that a rise in the expected exchange rate can raise both supply and demand for commodities and reduce domestic prices if the exchange rate elasticity of supply is greater than that of demand. Whether higher volatilities of exchange rate and foreign futures price can reduce the optimal spot position of domestic traders depends on the correlation between the exchange rate and the foreign futures price. Even though the forward exchange market is unbiased, and there is no correlation between commodity prices and exchange rates, the exchange rate can still affect domestic trading and prices through offshore hedging and international trade if the traders are interested in their profit in domestic currency. It illustrates how the world prices and foreign futures prices of commodities and their volatility can be transmitted to the domestic market as well as the dynamic relationship between intermediate and final goods prices. The equilibrium prices depends on trader behaviour i.e. who trades or does not trade in the foreign commodity futures and domestic forward currency markets. The empirical result applying a two-stage-least-squares approach to Thai rice and rubber prices supports the theoretical result.

Autumnal vs spring hatching in the fairy shrimp Siphonophanes grubii (Dybowski) (Crustacea, Anostraca): diversified bet-hedging strategy ?

Polyphenisms, as opposed to polymorphism, refers to coexistence of several distinct phenotypes having a common genotype. Polyphenism can be selected for in unpredictable environments. Here we document and anlyse a case of siphenism in the north-European fairy shrinp Siphonophanes grubii (Dybowski), in relation to the temporary and unpredictable nature of its habitat. The active part of this species'life cycle usually consists of a single, short-lived, spring cohort. Here we report field observations on autumnal hatching and on a long-lived, overwintering cohort; we show that the winter cohort runs the risk of total failure, due to the pond freezing entirely or drying up during winter. If, however, environmental conditions allow winter survival, animals reach a larger size, reproduce for a longer time, and display higher fecundity, than do animals from the spring cohort. Laboratory experiments support the theory that these differences are purely phenotypic and dependent on temperatur. Using an analytical model adapted from Cohen (1966), we propose that the coexistence of both a winter and a spring cohort in the same ponds can be interpreted as a diversified bet-hedging strategy.

Natural selection on fecundity variance in subdivided populations: kin selection meets bet hedging.

In a series of seminal articles in 1974, 1975, and 1977, J. H. Gillespie challenged the notion that the "fittest" individuals are those that produce on average the highest number of offspring. He showed that in small populations, the variance in fecundity can determine fitness as much as mean fecundity. One likely reason why Gillespie's concept of within-generation bet hedging has been largely ignored is the general consensus that natural populations are of large size. As a consequence, essentially no work has investigated the role of the fecundity variance on the evolutionary stable state of life-history strategies. While typically large, natural populations also tend to be subdivided in local demes connected by migration. Here, we integrate Gillespie's measure of selection for within-generation bet hedging into the inclusive fitness and game theoretic measure of selection for structured populations. The resulting framework demonstrates that selection against high variance in offspring number is a potent force in large, but structured populations. More generally, the results highlight that variance in offspring number will directly affect various life-history strategies, especially those involving kin interaction. The selective pressures on three key traits are directly investigated here, namely within-generation bet hedging, helping behaviors, and the evolutionary stable dispersal rate. The evolutionary dynamics of all three traits are markedly affected by variance in offspring number, although to a different extent and under different demographic conditions.

Inbreeding load, bet hedging, and the evolution of sex-biased dispersal

Inbreeding load affects not only the average fecundity of philopatric individuals but also its variance. From bet-hedging theory, this should add further dispersal pressures to those stemming from the mere avoidance of inbreeding. Pressures on both sexes are identical under monogamy or promiscuity. Under polygyny, by contrast, the variance in reproductive output decreases with dispersal rate in females but increases in males, which should induce a female-biased dispersal. To test this prediction, we performed individual-based simulations. From our results, a female-biased dispersal indeed emerges as both polygyny and inbreeding load increase. We conclude that sex-biased dispersal may be selected for as a bet-hedging strategy.

The Effectiveness of Currency Hedging Strategies. Case: Imatra Boards Business Unit of Stora Enso Corp.

Tutkimus tarkastelee vaihtoehtoisia termiinisuojaustrategioita metsäteollisuuden alan tulosyksikössä. Jälkitestauksen tarkoituksena on arvioida vaihtoehtoisten strategioiden tuloksellisuutta suojata case-yrityksen kassavirtoja seuraavan kolmen arviointikriteerin avulla: yksittäisten vieraan valuutan määräisten kassavirtojen vaihtelu; koko vieraan valuutan määräisen kassavirran vaihtelu; suojausvoitot ja -tappiot. Tutkimuksen teoreettinen viitekehys tarkastelee yrityksen päätöksentekoa, valuuttariskien suojausprosessia sekä esittelee yrityksen vaihtoehtoisia suojausstrategioita. Tutkimuksen empiirinen aineisto pohjautuu case- yrityksen historiallisiin myyntilukuihin ja on kerätty yrityksen tietojärjestelmästä. Muu tutkimuksessa käytetty dataon kerätty eri tietokannoista. Tutkimuksen tulokset osoittavat, että suojaaminen vähentää kassavirtojen vaihtelua. Suojaamisen taloudelliset tulokset ovat kuitenkin erittäin riippuvaisia valitusta suojausstrategiasta, joka voi johtaa merkittäviin suojausvoittoihin, mutta yhtä hyvin myos merkittäviin tappioihin. Johdon näkemykset ja riskitoleranssi määrittelevät mitä strategiaa yrityksessä tullaan viime kädessä noudattamaan.

Boosting Future Prospects or Softening Promises of Success? The Use of Emphatics and Hedging in the Letter to Shareholders Sections of Annual Reports

Tämä pro gradu -tutkielma käsittelee yritysten vuosikertomusten Toimitusjohtajan katsaus -osioissa esiintyvää metatekstiä. Erityisenä tutkimuskohteena ovat yrityksen tulevaisuutta käsittelevät lauseet ja niissä käytetty interpersonaalinen metateksti, jonka avulla kirjoittaja pyrkii joko vahvistamaan (emphatics-keinoin) tai heikentämään (hedging-keinoin) ilmaisujensa vahvuutta ja lukijalle niiden kautta välittyvää kuvaa viestin varmuudesta ja vakuuttavuudesta. Sijoittajille suunnattu Toimitusjohtajan katsaus käsittelee yleensä yrityksen edellisen vuoden tulosta, taloudellista asemaa sekä tulevaisuudennäkymiä. Tutkimuksen tarkoituksena oli selvittää, vaikuttaako yrityksen taloudellinen menestys vuosikertomuksen tässä osiossa käytetyn metatekstin määrään ja laatuun. Tutkimuksen teoriaosuudessa käsitellään ensiksi lyhyesti vuosikertomuksia ja niiden parissa tehtyä aiempaa kielitieteellistä tutkimusta, minkä jälkeen perehdytään tarkemmin metatekstin sekä hedging- ja emphatics-keinojen määrittelyyn. Näissä osioissa apuna toimivat muunmuassa Hylandin (1998) ja Cromptonin (1997) tutkimukset. Tutkimusaineistossa esiintyvien metatekstilajien määrittelyssä ja tunnistamisessa käytettiin apuna pääosin Crismore & Farnsworthin (1990) ja Grabe & Kaplanin (1997) tutkimuksia. Tutkimuksen aineistona oli yhteensä 23 yhdentoista amerikkalaisen yrityksen vuosikertomusta. Ne käsittivät esimerkkejä kunkin yhtiön talouden kannalta sekä erityisen hyviltä että huonoilta vuosilta. Aineistosta löydetty interpersonaalinen metateksti luokiteltiin viiteen eri ryhmään: modaaliverbit, hedging-verbit, muut hedging-keinot, emphatics-keinot ja evaluatives-keinot (eli kirjoittajan tekstistään tekemät subjektiiviset huomiot ja arviot). Tulokset osoittivat, että metatekstin käytössä ilmeni melkoista vaihtelua yksittäisten yritysten ja niiden hyvien ja huonojen vuosien välillä. Nämä eroavuudet eivät kuitenkaan vaikuttaneet merkittävästi koko aineiston kattaviin keskivertolukuihin, joiden avulla pyrittiin selvittämään hyvien ja huonojen vuosien välisiä yleisiä eroja. Tutkimuksen perusteella voidaan todeta, että Toimitusjohtajan katsaus –osioiden viittaukset yhtiön tulevaisuuteen heijastavat tavallisesti kirjoittajan varmuutta yrityksen menestyksekkäästä tulevaisuudesta riippumatta siitä, minkälainen vuosikertomuksessa käsitelty vuosi on ollut yhtiölle taloudellisesti. Yleisesti ottaen yhtiön taloudellisen tilan ei siis havaittu vaikuttavan Toimitusjohtajan katsauksessa käytetyn metadiskurssin määrään tai laatuun.

Dynamic Hedging with Credit Default Swaps: Empirical Evidence from the European Monetary Union

This thesis investigates the effectiveness of time-varying hedging during the financial crisis of 2007 and the European Debt Crisis of 2010. In addition, the seven test economies are part of the European Monetary Union and these countries are in different economical states. Time-varying hedge ratio was constructed using conditional variances and correlations, which were created by using multivariate GARCH models. Here we have used three different underlying portfolios: national equity markets, government bond markets and the combination of these two. These underlying portfolios were hedged by using credit default swaps. Empirical part includes the in-sample and out-of-sample analysis, which are constructed by using constant and dynamic models. Moreover, almost in every case dynamic models outperform the constant ones in the determination of the hedge ratio. We could not find any statistically significant evidence to support the use of asymmetric dynamic conditional correlation model. In addition, our findings are in line with prior literature and support the use of time-varying hedge ratio. Finally, we found that in some cases credit default swaps are not suitable instruments for hedging and they act more as a speculative instrument.

The knapsack problem approach in solving partial hedging problems of options

En option är ett finansiellt kontrakt som ger dess innehavare en rättighet (men medför ingen skyldighet) att sälja eller köpa någonting (till exempel en aktie) till eller från säljaren av optionen till ett visst pris vid en bestämd tidpunkt i framtiden. Den som säljer optionen binder sig till att gå med på denna framtida transaktion ifall optionsinnehavaren längre fram bestämmer sig för att inlösa optionen. Säljaren av optionen åtar sig alltså en risk av att den framtida transaktion som optionsinnehavaren kan tvinga honom att göra visar sig vara ofördelaktig för honom. Frågan om hur säljaren kan skydda sig mot denna risk leder till intressanta optimeringsproblem, där målet är att hitta en optimal skyddsstrategi under vissa givna villkor. Sådana optimeringsproblem har studerats mycket inom finansiell matematik. Avhandlingen "The knapsack problem approach in solving partial hedging problems of options" inför en ytterligare synpunkt till denna diskussion: I en relativt enkel (ändlig och komplett) marknadsmodell kan nämligen vissa partiella skyddsproblem beskrivas som så kallade kappsäcksproblem. De sistnämnda är välkända inom en gren av matematik som heter operationsanalys. I avhandlingen visas hur skyddsproblem som tidigare lösts på andra sätt kan alternativt lösas med hjälp av metoder som utvecklats för kappsäcksproblem. Förfarandet tillämpas även på helt nya skyddsproblem i samband med så kallade amerikanska optioner.

Variance reduction properties of dynamic hedging models - empirical evidence from BRICS countries

This Master’s Thesis analyses the effectiveness of different hedging models on BRICS (Brazil, Russia, India, China, and South Africa) countries. Hedging performance is examined by comparing two different dynamic hedging models to conventional OLS regression based model. The dynamic hedging models being employed are Constant Conditional Correlation (CCC) GARCH(1,1) and Dynamic Conditional Correlation (DCC) GARCH(1,1) with Student’s t-distribution. In order to capture the period of both Great Moderation and the latest financial crisis, the sample period extends from 2003 to 2014. To determine whether dynamic models outperform the conventional one, the reduction of portfolio variance for in-sample data with contemporaneous hedge ratios is first determined and then the holding period of the portfolios is extended to one and two days. In addition, the accuracy of hedge ratio forecasts is examined on the basis of out-of-sample variance reduction. The results are mixed and suggest that dynamic hedging models may not provide enough benefits to justify harder estimation and daily portfolio adjustment. In this sense, the results are consistent with the existing literature.

Derivative hedging strategies for bitumen price risk

The objective of the study is to extend the existing hedging literature of the commodity price risks by investigating what kind of hedging strategies can be used in companies using bitumen as raw material in their production. Five different alternative swap hedging strategies in bitumen markets are empirically tested. Strategies tested are full hedge strategy, simple, conservative, and aggressive term structure strategies, and implied volatility strategy. The effectiveness of the alternative strategies is measured by excess returns compared to no hedge strategy. In addition, the downside risk of each strategy is measured with target absolute semi-deviation. Results indicate that any of the tested strategies does not outperform the no hedge strategy in terms of excess returns in all maturities. The best-performing aggressive term structure strategy succeeds to create positive excess returns only in short maturities. However, risk seems to increase hand-in-hand with the excess returns so that the best-performing strategies get the highest risk metrics as well. This implicates that the company willing to gain from favorable price movements must be ready to bear a greater risk. Thus, no superior hedging strategy over the others is found.

A Nonparametric Approach to Pricing and Hedging Derivative Securities via Learning Networks

We propose a nonparametric method for estimating derivative financial asset pricing formulae using learning networks. To demonstrate feasibility, we first simulate Black-Scholes option prices and show that learning networks can recover the Black-Scholes formula from a two-year training set of daily options prices, and that the resulting network formula can be used successfully to both price and delta-hedge options out-of-sample. For comparison, we estimate models using four popular methods: ordinary least squares, radial basis functions, multilayer perceptrons, and projection pursuit. To illustrate practical relevance, we also apply our approach to S&P 500 futures options data from 1987 to 1991.

Dynamic programming for stochastic target problems, Viscosity solutions and hedging in markets with Portfolio constraints and large investors

The purpose of this expository arti le is to present a self- ontained overview of some results on the hara terization of the optimal value fun tion of a sto hasti target problem as (dis ontinuous) vis osity solution of a ertain dynami programming PDE and its appli ation to the problem of hedging ontingent laims in the presen e of portfolio onstraints and large investors