Large UK Companies and Derivatives

Derivative securities have transformed the way treasurers view financial price risk and have been used to hedge risks that were previously left open. In this paper, we present the results of surveys of treasurers of large UK companies to questions about their derivative use. We examine the extent of derivative use, the reasons for their use, the perceived risks associated with derivatives, what sort of controls are in place to monitor the use of derivatives, and, finally, reporting practices which govern the disclosure of derivative practices. Results of the surveys indicate widespread use of derivatives like swaps, forwards and options. The primary reasons for their use are to manage interest rate and currency risk. There is a rather limited, but growing, use of derivatives to manage commodity and equity risk. Treasurers report that they are somewhat cautious about more exotic types of derivatives, primarily because of concern over the illiquidity of the underlying market for these derivatives. Interestingly, treasurers revealed that they view control and the nature of their counterparty as the main risks in using derivatives. Finally, the use of derivatives is accompanied by significant control mechanisms inside companies, and treasurers are using sophisticated procedures to quantify their derivative exposures before they are reported at board level.     

Why and How UK Firms Hedge

This paper attempts to differentiate among the theories of hedging by using disclosures in the annual reports of 400 UK companies and data collected via a survey. I find, unlike many previous US studies, strong evidence linking the decision to hedge and the expected costs of financial distress. The tests show that this is mainly because my definition of hedging includes all hedgers and not just derivative users. However, when the tests employ the same hedging definition as previous US studies, financial distress cost factors still appear to be more important for this sample than samples of US firms. Therefore, a secondary explanation for the strong financial distress results might be due to differences in the bankruptcy codes in the two countries, which result in higher expected costs of financial distress for UK firms. The paper also examines the determinants of the choice of hedging method distinguishing between non‐derivative and derivatives hedging. My evidence shows that larger firms, firms with more cash, firms with a greater probability of financial distress, firms with exports or imports and firms with more short‐term debt are more likely to hedge with derivatives. Thus, differences in opportunities, in incentives for reducing risk and in the types of financial price exposure play an important role in how firms hedge their risks.     

Corporate risk management and firm value: evidence from the UK market

The paper evaluates the effect of corporate risk management activities on firm value, using a sample of large UK non-financial firms. Following recent changes in financial reporting standards, we are able to collect detailed information on risk management activities from audited financial reports. This enables us to gain a better understanding of risk management practices and to investigate value implications of different types of hedging. Overall 86.88% of the firms in the sample use derivatives to manage at least one type of price risk. The hedging premium is statistically and economically significant for foreign currency derivative users, while we provide weak evidence that interest rate hedging increases firm value. The extent of hedging and the hedging horizon have an impact on the hedging premium, whereas operational risk management activities do not significantly influence the market value of the firm.     

Three Approaches to Risk Management—and How and Why Swedish Companies Use Them

Companies can manage risk by using derivatives or through operational hedging. But there is a third possibility: to leave their operating cash flows unhedged while ensuring that the firm has access to external finance in adverse states of the world. This article reports the findings of a recent survey of over 800 Swedish companies that aims to shed light on the relative importance of these three risk management methods, as well as how they interact in corporate risk management programs. The results show that risk management practices aimed at ensuring access to external finance are the main method used by the largest number of companies, followed by operational hedging methods and financial hedging with derivatives. Large companies hedge using both operational methods and derivatives, whereas small firms are less likely to use derivatives but nevertheless attach great importance to the other two ways of managing risk. Even among the largest companies, operational hedging tends to deemed more important than hedging with derivatives—a finding that, although perhaps a surprise to financial professionals, underscores the authors’ finding that operational and derivative‐based hedges function as complements rather than substitutes. Indeed, the authors report that the most financially sophisticated companies tend to use all three of these common forms of risk management.     

上市公司使用金融衍生品避险动机的实证研究——来自金融保险业的经验证据

以我国2006—2008年金融、保险板块上市公司为研究样本,对我国上市公司使用金融衍生品的避险动机,运用Logstic归进行了研究。结果发现,只有公司规模与金融衍生品需求正相关。表明了我国金融衍生产品市场还处于发展初期,使用金融衍生品的公司参与避险的数量不多,资产规模小的金融机构风险管理经验尤为缺乏。     

Financial derivatives,opacity, and crash risk: Evidence from large US banks

We test how the use of financial derivatives affects banks’ informational structure and future stock performance based on a sample of large bank holding companies in the US. Using banks’ use of financial derivatives as a proxy for opacity, we find that high level use of interest rate and foreign exchange derivatives are associated with an increase in the synchronicity (R²) of stock price movements with the market index, which indicates less revelation of bank-specific information to the market. This finding is consistent with the prediction of the model developed by Wagner (2007). We document that superior corporate governance tempers these effects. Finally, we find that an increase in the opacity is significantly and positively related to an increase in banks’ future stock price crash risk.     

DO INSTITUTIONAL INVESTORS IN THE UK ADOPT A DUAL STRATEGY FOR MANAGING FOREIGN EXCHANGE RISK?

In recent years, the gradual increase in international portfolio diversification within the UK institutional investment community has led to a growing need to manage foreign exchange (FX) risk. This paper reports on the findings of a postal questionnaire survey relating to FX risk management practices in UK institutional investment organisations. The findings demonstrate an increasing awareness of the FX risk management problem and indicate that UK investment institutions actively manage FX risk within their investment portfolios. The paper also focuses on the interesting question of whether UK institutional investors manage their own portfolio's FX risk, simultaneously concerning themselves with their investee companies’ FX risk management practices. Overall, the findings indicate that institutional investors adopt adual strategyfor managing FX risk; not only managing their own FX risk, but also requiring that their investee companies manage FX risk. There is also evidence to suggest that the institutional investors require their investee companies to disclose information relating to their FX risk management policies.     

Does Risk Management Add Value? A Survey of the Evidence

The fact that 92% of the world's 500 largest companies recently reported using derivatives suggests that corporate managers believe financial risk management can increase shareholder value. Surveys of finance academics indicate that they too believe that corporate risk management is, on the whole, a valueadding activity. This article provides an overview of almost 30 years of broadbased, stock‐market‐oriented academic studies that address one or more of the following questions:

• ? Are interest rate, exchange rate, and commodity price risks reflected in stock price movements?
• ? Is volatility in corporate earnings and cash flows related in a systematic way to corporate market values?
• ? Is the corporate use of derivatives associated with reduced risk and higher market values?

The answer to the first question, at least in the case of financial institutions and interest rate risk, is a definite yes; all studies with this focus find that the stock returns of financial firms are clearly sensitive to interest rate changes. The stock returns of industrial companies exhibit no pronounced interest rate exposure (at least as a group), but industrial firms with significant cross‐border revenues and costs show considerable sensitivity to exchange rates (although such sensitivity actually appears to be reduced by the size and geographical diversity of the largest multinationals). What's more, the corporate use of derivatives to hedge interest rate and currency exposures appears to be associated with lower sensitivity of stock returns to interest rate and FX changes. But does the resulting reduction in price sensitivity affect value—and, if so, how? Consistent with a widely cited theory that risk management increases value by limiting the corporate “underinvestment problem,” a number of studies show a correlation between lower cash flow volatility and higher corporate investment and market values. The article also cites a small but growing group of studies that show a strong positive association between derivatives use and stock price performance (typically measured using price‐to‐book ratios). But perhaps the nearest the research comes to establishing causality are two studies—one of companies that hedge FX exposures and another of airlines' hedging of fuel costs—that show that, in industries where hedging with derivatives is common, companies that hedge outperform companies that don't.     

LONG-TERM STOCK PRICE REVERSALS IN THE UK: EVIDENCE FROM REGRESSION TESTS

This paper seeks to advance our knowledge about the UK evidence on long-term stock price reversals. Many of the major studies of long-term reversals have been done using US data, prompting fears about data snooping biases. There have been comparatively few UK studies and they have all employed contrarian portfolio techniques to identify evidence of reversals. None of these UK studies has used cross-section regression tests, which have been employed in some of the US investigations, and this paper aims to fill this gap. We find evidence of stock price reversals, even after controlling for time-varying risk and restricting the study to larger, UK-listed companies—that is, companies that are frequently traded, more heavily regulated and extensively analysed by market commentators, analysts and institutional investors.     

Weather Derivatives and Weather Risk Management

Weather derivatives are a relatively recent kind of financial product developed to manage weather risks, and currently the weather derivatives market is the fastest-growing derivative market. The development of weather derivatives represents one of the recent trends toward the convergence of insurance and finance. This article presents an overview of weather risks, weather derivatives, and the weather derivatives market, and examines the valuation of weather derivatives in an incomplete market, the hedging effectiveness of standardized weather derivatives, as well as optimal weather hedging with the consideration of basis risk and credit risk.     

What do financial intermediaries do?

This paper presents evidence that the traditional banking business of accepting deposits and making loans has declined significantly in the US in recent years. There has been a switch from directly held assets to pension funds and mutual funds. However, banks have maintained their position relative to GDP by innovating and switching from their traditional business to fee-producing activities. A comparison of investor portfolios across countries shows that households in the US and UK bear considerably more risk from their investments than counterparts in Japan, France and Germany. It is argued that in these latter countries intermediaries can manage risk by holding liquid reserves and intertemporally smoothing. However, in the US and UK competition from financial markets prevents this and risk management must be accomplished using derivatives and other similar techniques. The decline in the traditional banking business and the financial innovation undertaken by banks in the US is interpreted as a response to the competition from markets and the decline of intertemporal smoothing.     

The Leasing Decision: A Comparison of Theory and Practice

The UK leasing industry has grown dramatically in the 1980s. The academic literature suggests that there are two major reasons for leasing—taxation benefits and off-balance sheet financing. Recently taxation and financial reporting changes have substantially reduced the taxation and off-balance sheet financing benefits from leasing. Against this background a postal questionnaire survey of the opinions of UK financial managers on various issues relating to finance leases was undertaken. This paper reports on the findings of the questionnaire survey. A distinguishing feature of the survey is that the replies were analysed by various financial characteristics of the responding companies.     

Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers

This paper studies the hedging policies of oil and gas producers between 1992 and 1994. My evidence shows that the extent of hedging is related to financing costs. In particular, companies with greater financial leverage manage price risks more extensively.My evidence also shows that the likelihood of hedging is related to economies of scale in hedging costs and to the basis risk associated with hedging instruments. Larger companies and companies whose production is located primarily in regions where prices have a high correlation with the prices on which exchange-traded derivatives are based are more likely to manage risks.     

Pricing rainfall futures at the CME

Many business people such as farmers and financial investors are affected by indirect losses caused by scarce or abundant rainfall. Because of the high potential of insuring rainfall risk, the Chicago Mercantile Exchange (CME) began trading rainfall derivatives in 2011. Compared to temperature derivatives, however, pricing rainfall derivatives is more difficult. In this article, we propose to model rainfall indices via a flexible type of distribution, namely the normal-inverse Gaussian distribution, which captures asymmetries and heavy-tail behaviour. The prices of rainfall futures are computed by employing the Esscher transform, a well-known tool in actuarial science. This approach is flexible enough to price any rainfall contract and to adjust theoretical prices to market prices by using the calibrated market price of risk. The empirical analysis is conducted with US precipitation data and CME futures data providing first results on the market price of risk for rainfall derivatives.     

A Corporate View of Research Needs in Corporate Finance

This paper reports the results of a survey of UK chief financial officers (CFOs) drawn from 72 large, 34 medium and 37 small companies on potentially important research topics in corporate finance. The paper suggests that there are gaps between extant academic research and the CFOs ‘needs for such research. The topics that the 143 CFOs would like to see on the research agenda include: the influence of tax laws on financial decision-making; investor reactions to companies concentrating on short-term gains to the almost total neglect of long-term benefits; effects of changes to the law on pension funds; cash flow planning and forecasting; regulators’ awareness of financial issues; and methods for determining the riskiness of a project. Of least importance to the CFOs are research on the significance of bankruptcy costs, influence of the City on corporate financial operations and impact of seasons on operational decisions. The degree of importance attributed to research topics seems to vary with firm size. In general, the findings of this study are similar to those from a survey of financial managers in the US.     

Exchange rate exposure and foreign exchange derivatives: do ineffective hedgers modify future derivatives use?

Recent studies examining the relationship between stock returns and exchange rate changes have provided evidence that the exchange rate exposure of non-financial companies is reduced by the use of foreign exchange derivatives. Building on such research, this study investigates whether past ineffective derivative hedging contributes to explaining future derivatives use. To the extent that companies monitor the effectiveness of their currency risk management practices, past ineffective hedgers can be expected to modify their future use of foreign exchange derivatives accordingly. In our study of 94 non-financial US multinationals, we provide evidence that the change in derivatives use from 1996–1998 to 1998–2000 can be explained in part by the ineffective hedging of currency risk in 1996–1998, controlling for variables associated with theories of optimal hedging. Additional analyses confirm that such primary results are robust to firm size, the level of foreign operations, and the use of derivatives to partially hedge currency risk. Our results imply that as exchange markets and risk management practices change, the use of derivatives to manage exchange rate risk also changes. Our contribution to this field of study is that we find evidence that past ineffective hedgers tend to increase their future use of FXDs.     

汇率风险对冲如何影响企业并购行为——基于自由现金流的视角

本文基于2001—2019年上市公司年报中关于外汇衍生品的使用信息,研究发现,使用外汇衍生品的上市公司相比未使用的公司发起并购的概率更低,但并购的市场和经营绩效有所提高。主要原因在于,中国上市公司进行并购通常以企业自有资金进行现金支付,外汇衍生品的使用大幅降低了公司出于预防性动机而持有的现金,从而降低了公司发起并购的概率。此外,进行汇率风险对冲可避免公司因持有大量自由现金流而发生的过度投资行为,从而提高了公司的投资效率。总体而言,使用外汇衍生品进行汇率风险对冲可使上市公司更注重并购质量而非并购数量,从而实现“少而精”的投资策略。本文研究对进一步厘清企业使用外汇衍生品的相关影响提供了一定参考。     

统一监管:我国埸内衍生品监管模式的选择

本文基于国际场内衍生品的发展趋势,提出我国的场内衍生品监管模式应有利于提升衍生品交易所竞争力、鼓励场内衍生品市场创新、控制金融风险、提高监管效率和避免监管冲突与遗漏,从这些标准出发,本文对不同监管模式进行了分析,认为我国场内衍生品监管应选择统一监管模式。     

中国利率市场的价格发现——对国债现货、期货以及利率互换市场的研究

本文采用信息份额模型和基于向量自回归(VAR)模型的格兰杰因果检验,研究了国债现货、国债期货和利率互换三个市场之间的价格发现机制。信息份额模型表明,从整体来看利率互换相对于国债期货和国债现货都具有信息优势,而国债期货相对于国债现货具有信息优势。另外,国债期货的价格发现能力相对于另外两个市场都在随时间增强。格兰杰因果检验结果显示,利率互换在价格发现中单向引领国债期货以及国债现货,国债期货单向引领国债现货。所有结果一致表明, 利率互换和国债期货这两种利率衍生产品在引导中国利率市场价格发现中发挥了重要作用。