A hedging deficiency in eurodollar futures

The eurodollar futures contract of the Chicago Mercantile Exchange is arguably the most successful of all futures contracts. The contract is structured such that its price does not converge to the price of the underlying eurodollar time deposit. Ignoring the daily settlement, one typically assumes that a eurodollar futures contract perfectly hedges an anticipated loan pegged to LIBOR, provided the loan rate is set at the eurodollar expiration. This article demonstrates that this hedge is not perfect, leaving a risk empirically estimated at four basis points, a seemingly small amount but considerably larger than the bid–ask spread on the futures. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:189–207, 2006     

Relative risk aversion among the elderly

This paper examines portfolio allocation behavior of the elderly, investigating whether their behavior conforms to Arrow's postulate of increasing relative risk aversion. Additionally, the effects on risk aversion of age, race, gender, education, health status, and the number of children are examined. The source of data is the AHEAD data set that is comprised of households with at least one member aged 70 or over. In the preferred specification, evidence supports a finding of modestly decreasing relative risk aversion and statistical significance for the personal characteristics examined. Implications are drawn for the likely security markets effects of an aging population.     

UNIVERSITY OF GEORGIA ROUNDTABLE ON: Enterprise‐Wide Risk Management

For many years, MBA students were taught that there was no good reason for companies that hedge large currency or commodity price exposures to have lower costs of capital, or trade at higher P/E multiples, than comparable companies that choose not to hedge such financial price risks. Corporate stockholders, just by holding well‐diversified portfolios, were said to neutralize any effects of currency and commodity price risks on corporate values. And corporate efforts to manage such risks were accordingly viewed as redundant, a waste of corporate resources on a function already performed by investors at far lower cost. But as this discussion makes clear, both the theory and the corporate practice of risk management have moved well beyond this perfect markets framework. The academics and practitioners in this roundtable begin by suggesting that the most important reason to hedge financial risks—and risk management's largest potential contribution to firm value—is to ensure a company's ability to carry out its strategic plan and investment policy. As one widely cited example, Merck's use of FX options to hedge the currency risk associated with its overseas revenues is viewed as limiting management's temptation to cut R&D in response to large currency‐related shortfalls in reported earnings. Nevertheless, one of the clear messages of the roundtable is that effective risk management has little to do with earnings management per se, and that companies that view risk management as primarily a tool for smoothing reported earnings have lost sight of its real economic function: maintaining access to low‐cost capital to fund long‐run investment. And a number of the panelists pointed out that a well‐executed risk management policy can be used to increase corporate debt capacity and, in so doing, reduce the cost of capital. Moreover, in making decisions whether to retain or transfer risks, companies should generally be guided by the principle of comparative advantage. If an outside firm or investor is willing to bear a particular risk at a lower price than the cost to the firm of managing that risk internally, then it makes sense to lay off that risk. Along with the greater efficiency and return on capital promised by such an approach, several panelists also pointed to one less tangible benefit of an enterprise‐wide risk management program—a significant improvement in the internal corporate dialogue, leading to a better understanding of all the company's risks and how they are affected by the interactions among its business units.     

Internet shopping and internet banking in sequence: An explanatory case study

Adoption of Internet banking often follows on from usage of Internet shopping, but policies to increase Internet banking use typically ignore this ordering. This article presents a case study that underscores this sequence of Internet service adoption and identifies factors that shape the propensity to use the Internet for shopping and banking. Application of bivariate probit regression techniques to data sourced from a survey of 259 respondents in Athens, Greece, and estimation of marginal effects of the determinants of Internet banking use conditioned on the determinants of Internet shopping use illustrate that ignoring the sequence of Internet service use can lead to incorrect policy recommendations. This article contributes to the literature by theorising the underlying causal mechanisms of Internet banking adoption and presenting supporting evidence via a sequential modelling approach. We find that personal capacity is an important determinant of Internet banking use in a standard, non-sequential approach but it has no significant effect when the model is sequential. Our results suggest that policymakers should emphasise usefulness attributes of Internet banking when attempting to increase Internet banking usage by people who already use the Internet for shopping.     

Share Option Rewards and Managerial Performance: an Abnormal Performance Index Model

Managerial share option schemes are widely used as a means of motivating and rewarding corporate performance. Such schemes normally adopt a static exercise price; when additional exercise criteria are employed they are often based on earnings per share. A static exercise price does not adjust for economic changes outside the control of management, and earnings per share hurdles have similar limitations. This paper presents a ‘phantom’ managerial option based on relative performance, together with a pricing model for the valuation of the option. The option is developed and demonstrated using an abnormal performance index. It offers a structure which could be used for different forms of performance measurement, and resolves some important criticisms of the reward and incentive effects of traditional schemes.     

Wavelet timescales and conditional relationship between higher-order systematic co-moments and portfolio returns

This paper investigates the association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multi-scaling, a technique that decomposes a given return series into timescales enabling investigation at different return intervals. In Australian industry portfolios, the relative risk positions indicated by systematic co-moments at some timescales are different from those revealed in daily returns. A strong positive (negative) linear association between beta and portfolio return and co-kurtosis and portfolio return in the up (down) market is observed in daily returns and at different timescales. The beta risk is priced in the up and down markets. Co-kurtosis is not priced when the beta is in the pricing model. Co-skewness appears to be priced at a relatively high timescale and this is observed only after the up and down separation of market returns.