Hedging,speculation, and shareholder value

We document that gold mining firms have consistently realized economically significant cash flow gains from their derivatives transactions. We conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms’ systematic risk. This finding contradicts a central assumption in the risk management literature that derivatives transactions have zero net present value, and highlights an important motive for firms to use derivatives that the literature has hitherto ignored. Although we find considerable evidence of selective hedging in our sample, the cash flow gains from selective hedging appear to be small at best.     

Hedging the smirk

This article presents a simple “model-free” method for inferring deltas and gammas from implicit volatility patterns. An illustration indicates that Black–Scholes deltas and gammas are substantially biased in the presence of the sort of smirks and smiles evident in stock index options.     

Hedging options

This paper considers the problem of forming a hedge when there are perceived profit opportunities. We show that the option price obeys a modified Black and Scholes equation. Iterative methods yield the appropriate hedge ratio.     

Hedging customers

You are a marketing director with $5 million to invest in customer acquisition and retention. Which customers do you acquire, and which do you retain? Up to a point, the choice is obvious: Keep the consistent big spenders and lose the erratic small ones. But what about the erratic big spenders and the consistent small ones? It's often unclear whether you should acquire or retain them and at what cost. Businesses have begun dealing with unpredictable customer behavior by following the practices of sophisticated investors who own portfolios comprising dozens of stocks with different, indeed divergent, histories and prospects. Each portfolio is diversified so as to produce the investor's desired returns at the particular level of uncertainty he or she can tolerate. Customers, too, are assets--risky assets. As with stocks, the cost of acquiring them is supposed to reflect the cash-flow values they are likely to generate. The authors explain how to construct a portfolio based on the notion that a customer's risk-adjusted lifetime value depends on its anticipated effect on the riskiness of the group it is joining. They also show how this approach was used to identify the best prospects for Myron Corporation, a global leader in the personalized business-gift industry. The concept of risk-adjusted lifetime value has a transforming power: For companies that rely on it, product managers will be replaced by customer managers, and the current method of accounting for profit and loss--which is by product--will be replaced by one that determines each customer's P&L. Once adjusted for risk, those P&Ls will become the firm's key performance and operational metric.     

On the Determinants of Corporate Hedging

Finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distress, or other agency costs. This paper provides evidence on these hypotheses using survey data on firm's use of forwards, futures, swaps, and options combined with COMPUTSTAT data on firm characteristics. Of 169 firms in the sample, 104 firms use hedging instruments in 1986. The data suggest that firms which hedge face more convex tax functions, have less coverage of fixed claims, are larger, have more growth options in their investment opportunity set, and employ fewer hedging substitutes.     

Hedging role of stablecoins

Wild price fluctuations of cryptocurrencies make it difficult for investors to maintain stable asset values. This study investigates the hedging properties of US dollar (USD)-pegged stablecoins against bitcoin returns. We analyzed the hedging abilities of the three largest stablecoins—namely, Tether, USD Coin, and Binance USD—using the dynamic conditional correlation–generalized autoregressive conditional heteroskedasticity, dummy variable regression, vector autoregression, and impulse response functions. We found that stablecoins are generally negatively correlated with bitcoin returns, indicating that they can be effective hedging instruments against high-volatility crypto assets. Among the stablecoins, Binance USD offers the largest risk reduction, and Tether was a weak safe haven during the COVID-19 crisis period. Crypto investors can diversify their portfolios by holding stablecoins.     

Global Currency Hedging

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar), the euro, and the Swiss franc (particularly in the second half of the period) moved against world equity markets. Thus, these currencies should be attractive to risk-minimizing global equity investors despite their low average returns. The risk-minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk-minimizing investors should adjust their currency positions in response to movements in interest differentials.     

Hedging and competition

We consider firms that, all else equal, wish to minimize variability in their internal capital (due to convex costs of raising external funds). The firms can hedge the cash flow risk of the project, but not that of winning or losing the auction. We characterize optimal hedging and bidding strategies in this competition framework. We show that access to financial markets makes firms bid more aggressively, possibly even above their valuation for the project. In addition, hedging increases the variance of bids and makes firm values more dispersed. Further, with hedging, the covariance of internal capital changes with the risk factor is negative, and is more negative, the higher the correlation of the hedging instrument with the risk factor.     

Hedging Corporate Bonds

We examine Treasury bond and stock index futures, the swap curve and two types of hypothetical corporate bond assets as alternative hedging instruments for portfolios of corporate bonds. Conducting ex post and ex ante tests we find evidence that credit quality and maturity are important sources of basis risk when hedging corporate bonds whose credit rating are below triple A. We conclude that a new corporate hedging instrument may be useful for those wishing to hedge corporate bond portfolios provided that transaction costs are not too high relative to existing futures contracts.     

Hedging and liquidity

This article develops a model for evaluating alternative hedgingstrategies for financially constrained firms. A key advantageof the model is the ability to capture the intertemporal effectsof hedging on the firm's financial situation. We characterizethe optimal hedge. A wide range of alternative hedging strategiescan be specified and the model allows us to determine in eachcase if the hedging strategy raises or lowers firms value andby how much. We show that hedging firm value, hedging cash flowfrom operations and hedging sales revenue are not optimal. Thearticle highlights the fact that every hedging strategy comespackaged with a borrowing strategy which requires careful consideration.     

Corporate Hedging in the Insurance Industry

Abstract

In this paper we investigate the extent to which insurance companies utilize financial derivatives contracts in the management of risks The data set we employ allows us to observe the universe of individual insurer transactions for a class of contracts, namely, those normally thought of as off-balance-sheet (OBS) We provide information on the number of insurers using various types of derivatives contracts and the volume of transactions in terms of notional amounts and the number of counterparties. Life insurers are most active in interest rate and foreign exchange derivatives, while property/casualty insurers tend to be active in trading equity option and foreign exchange contracts Using a multivariate probtt analysis, we explore the factors that potentially influence the existence of OBS activities. We also investigate questions relating to whether certain subsets of OBS transactions (for example, exchange traded) are related to such things as interest rate risk measures, organizational form and other characteristics that may discriminate between desired risk/return profiles across a cross-section of insurers. We find evidence consistent with the use of derivatives by insurers to hedge risks posed by guaranteed investment contracts (GICs), coilater-alized mortgage obligations (CMOs), and other sources of financial risk     

Hedging volatility risk

Volatility risk plays an important role in the management of portfolios of derivative assets as well as portfolios of basic assets. This risk is currently managed by volatility “swaps” or futures. However, this risk could be managed more efficiently using options on volatility that were proposed in the past but were never introduced mainly due to the lack of a cost efficient tradable underlying asset.The objective of this paper is to introduce a new volatility instrument, an option on a straddle, which can be used to hedge volatility risk. The design and valuation of such an instrument are the basic ingredients of a successful financial product. In order to value these options, we combine the approaches of compound options and stochastic volatility. Our numerical results show that the straddle option is a powerful instrument to hedge volatility risk. An additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk.     

Methods of Partial Hedging

In this article we survey methods of dealing with the following problem: A financial agent is trying to hedge a claim C, without having enough initial capital to perform a perfect (super) replication. In particular, we describe results for minimizing the expected loss of hedging the claim C both in complete and incomplete continuous-time financial market models, and for maximizing the probability of perfect hedge in complete markets and markets with partial information. In these cases, the optimal strategy is in the form of a binary option on C, depending on the Radon-Nikodym derivative of the equivalent martingale measure which is optimal for a corresponding dual problem. We also present results on dynamic measures for the risk associated with the liability C, defined as the supremum over different scenarios of the minimal expected loss of hedging C. This revised version was published online in August 2006 with corrections to the Cover Date.     

Currency Hedging Using the Mean-Gini Framework

The mean-Gini framework has been suggested as a robust alternative to the portfolio approach to futures hedging given its optimality under general distributional conditions. However, calculation of the Gini hedge ratio requires estimation of the underlying price distribution. We estimate minimum-Gini hedge ratios using two widely-used estimation procedures, the empirical distribution function method and the kernel method, for three emerging market and three developed market currencies. We find that these methods yield different Gini hedge ratios. These differences increase with risk aversion and are statistically significant for all developed market currencies but only one emerging market currency. In-sample analyses show that the empirical distribution function method is more effective at risk reduction than the kernel method for developed market currencies, whereas the kernel method is superior for emerging market currencies. Post-sample analyses strengthen the superiority of the empirical distribution function method for developed market and, in several cases, for emerging market currencies.JEL Classification: F31, G15     

论掉期有效性衡量指标的运用

经济学家爱德林顿1979年提出了一个期货掉期交易的有效性衡量指标.从那以后,这项指标在理论界被广泛用做比较衡量指标,即将不同的掉期比率和普通最小平方掉期比率进行对比.本文试图阐明这种对比的方法是不恰当的.爱德林顿的掉期有效性仅适用于衡量普通最小平方掉期比率算出的风险降低,不适用于其他的掉期比率.因此也不能做为一个标准尺度来衡量不同的掉期战略与普通最小平方法掉期战略之间的优劣.片面地强调这一法则的运用是不妥的.     

实战汇率避险

今年以来,随着国内外经济金融形势的变化,人民币对外不断升值,人民币汇率形成机制改革的进一步深化,银行组合型汇率避险产品不断丰富,满足了企业规避汇率风险及财务运作需求,准确了解这些产品的特征和运转模式,在很大程度上有利于CFO们全面及时摆布企业资产,并力求取得收益最大化和风险最小化。     

Static Hedging of Exotic Options

This paper develops static hedges for several exotic options using standard options. The method relies on a relationship between European puts and calls with different strike prices. The analysis allows for constant volatility or for volatility smiles or frowns.     

Hedging individual mortgage risk

This paper investigates the feasibility of an individual hedging the interest rate risk involved in planning to take out a mortgage at a future point in time. Simulation using market data indicates that a simple futures hedge reduces the variation in mortgage capacity by about one half. Expected mortgage capacity is very close to 100% of the original capacity at a very low cost. Hedging the individual mortgage with a put futures option is less effective in reducing downside risk and has a higher expected cost.     

Hedging efficiently under correlation

We show that when a derivative portfolio has different correlated underlyings, hedging using classical greeks (first-order derivatives) is not the best possible choice. We first show how to adjust greeks to take correlation into account and reduce P&L volatility. Then we embed correlation-adjusted greeks in a global hedging strategy that reduces cost of hedging without increasing P&L volatility, by optimization of hedge re-adjustments. The strategy is justified in terms of a balance between transaction costs and risk-aversion, but, unlike more complex proposals from previous literature, it is completely defined by observable parameters, geometrically intuitive, and easy to implement for an arbitrary number of risk factors. We test our findings on a CVA hedging example. We first consider daily re-hedging: in this test, correlation-adjusted greeks allow the reduction of P&L volatility by more than 30% compared to standard deltas. Then we apply our general strategy to a context where a CVA portfolio is exposed to both credit and interest rate risk. The strategy keeps P&L volatility in line with daily standard delta-hedging, but with massive cost-saving: only six rebalances of the illiquid credit hedge are performed, over a period of six months.