Journal articles: 'Hedging (Finance) – Accounting'

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WILCOX, JARROD. "Better Dynamic Hedging." Journal of Risk Finance 2, no. 4 (March 2001): 5–15. http://dx.doi.org/10.1108/eb043471.

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Alghalith, Moawia. "Input hedging: generalizations." Journal of Risk Finance 8, no. 3 (May 29, 2007): 309–12. http://dx.doi.org/10.1108/15265940710750521.

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Hoelscher, Seth A. "Voluntary hedging disclosure and corporate governance." Review of Accounting and Finance 19, no. 1 (June 10, 2019): 5–29. http://dx.doi.org/10.1108/raf-01-2018-0001.

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Purpose This paper aims to investigate the implications of governance quality on a firm’s information environment in the context of voluntary changes in hedging disclosures made by oil and gas companies. Design/methodology/approach The research utilizes a Factiva-guided search to hand-collect public disclosures related to changes in hedging policies along with the hand collection of financial derivatives positions and operational hedging contracts data using 10-K filings. The paper addresses self-selection bias, which typically plagues voluntary disclosure studies, by implementing a Heckman (1979) two-step model to estimate the decision process, make changes in their hedge program and, conditional on making changes to their hedging activities, provide disclosure. Findings Oil and gas firms with relatively poor governance are more likely to voluntarily disclose hedging changes and do so more frequently (substitution hypothesis). There is evidence that poorly governed firms in the presence of large shareholders (i.e. high institutional ownership) are more likely to provide transparency of hedging policy changes. Originality/value This is the first study to combine hand-collected changes in hedging voluntary disclosures and hand-collected derivative position data to investigate the interaction of corporate governance and voluntary disclosure. The sample allows for analysis between three sub-samples: companies that do not make changes in hedging and do not hedge, firms that make changes in their hedging policies but do not disclose the changes during a given year and companies that change their hedging activities and provide voluntary disclosure. This unique setting helps to alleviate concerns of self-selection bias associated with voluntary disclosure.

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Korkeamäki, Timo, Eva Liljeblom, and Markus Pfister. "Airline fuel hedging and management ownership." Journal of Risk Finance 17, no. 5 (November 21, 2016): 492–509. http://dx.doi.org/10.1108/jrf-06-2016-0077.

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Purpose The purpose of this paper is to study the value effects of hedging in the airline industry during a period of high volatility and high fuel costs. The authors also study the determinants of hedging in the airline industry, most importantly whether managerial ownership affects airlines’ tendency to hedge their fuel price risk. Design/methodology/approach This study’s research design follows closely previous studies in the area. This allows comparison of the results of this study to those reported earlier, and thus the authors can draw conclusions about the effects of the different market conditions during the sample period. Findings The authors find a positive relationship between hedging and firm value, but the relationship is weaker than what is reported in prior studies. The result appears driven by the early part of the sample, whereas in the latter half of the sample, when uncertainty and fuel price are higher, the hedging premium is smaller. The authors also find that hedging premium is larger for firms that follow passive hedging strategies and that managerial ownership increases the firms’ degree of hedging. Originality/value This study provides new results on the old question of whether hedging generates value in the airline industry. The recent period of high volatility and high fuel prices makes this an interesting question to re-visit.

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Schnabel, Jacques A. "Hedging and debt overhang: a conceptual note." Journal of Risk Finance 16, no. 2 (March 16, 2015): 164–69. http://dx.doi.org/10.1108/jrf-10-2014-0140.

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Purpose – This paper aims to examine the nexus between hedging, which reduces the volatility of corporate assets, and the anomaly of debt overhang, whereby corporate management is motivated to reject positive net present value (NPV) projects. The question of whether hedging ameliorates or aggravates debt overhang is addressed. Design/methodology/approach – The Black–Scholes isomorphism between common shares and call options is exploited to determine the allocation of a project’s NPV between debt- and stock-holders. The effect of hedging on this NPV-partitioning is then gauged to determine the resulting likelihood of debt overhang. Findings – If the volatility of corporate assets is below a critical maximum, hedging ameliorates debt overhang consistent with extant theoretical research. However, above that critical value of volatility, hedging aggravates debt overhang. Originality/value – The novel result of this note, namely, hedging may exacerbate debt overhang, is demonstrated both analytically and intuitively. The latter is explained by allusion to a second agency-theoretic conflict between debt- versus stock-holders, namely, risk shifting. The disparate effects of hedging on debt overhang imply a non-monotonic relationship between metrics for these two variables, which is a phenomenon that extant empirical studies have failed to take into account.

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Powers, Michael R. "Diversification, hedging, and “pacification”." Journal of Risk Finance 11, no. 5 (November 9, 2010): 441–45. http://dx.doi.org/10.1108/15265941011092031.

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Ebach, Eva Marie, Michael Hertel, Andreas Lindermeir, and Timm Tränkler. "Toward an optimal hedging strategy considering earnings volatility through fair value accounted financial derivatives." Journal of Risk Finance 17, no. 3 (May 16, 2016): 310–27. http://dx.doi.org/10.1108/jrf-07-2015-0064.

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Purpose The purpose of this paper is to determine a financial institution's optimal hedging degree under consideration of costly earnings volatility induced by fair value accounted derivatives. The discussion on the adoption of fair value accounting in the financial industry has been rather controversial in recent years. Under this accounting regime, the change in market values of specific assets must be considered as profit or loss. Critics argue that fair value accounting induces higher earnings volatility compared to historical cost accounting and, therefore, may initiate a downward spiral during recessions. Thus, increased earnings volatility induces costs, which can be explained by disappointed capital market expectations. Consequently, in general, a lowering of earnings volatility will be rewarded. Consistent with this theoretical finding, empirical research provides strong evidence that companies pursue income smoothing to reduce earnings volatility. In contrast to industrial corporations, financial institutions may easily reduce their earnings volatility by engaging in additional hedging activities. However, more intense hedging usually reduces expected profits. Design/methodology/approach Based on a research project initiated by a large German bank, this study quantitatively models the trade-off between the (utility of) costs of earnings volatility and the reduction of profit potential through additional hedging. Findings By conducting sensitivity analyses and simulations of the crucial factors of the trade-off, we examine relevant causal relationships to obtain first indications about the economic benefits of income smoothing. Originality/value To the best of our knowledge, we are the first to develop an optimization model that supports decision-making by attempting to determine an optimal (additional) hedging degree considering the costs induced by earnings volatility.

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I. Ivanov, Stoyu. "Analysis of the impact of improved market trading efficiency on the speculation-hedging relation." Journal of Risk Finance 15, no. 2 (March 17, 2014): 180–94. http://dx.doi.org/10.1108/jrf-11-2013-0077.

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Purpose – In this study, the author aims to examine the behavior of QQQ options at the time of the QQQ move from AMEX to NASDAQ on December 1, 2004. The author addresses the questions: is there a relation between hedging and speculation, if such a relation exists considering the improvement in market trading efficiency after the QQQ move did the relation between speculative demand for options and hedging demand for options strengthen at the time of the QQQ move, if such a relation exists does hedging activity follow speculative activity. Design/methodology/approach – The author uses the fact that deep-out-of-the-money puts are used for hedging, whereas deep-out-of-the-money calls are used for speculation. The author uses spectral analysis on QQQ options in the attempt to answer the research question. The author uses spectral analysis because the data in the study are non-normally distributed which would make parametric testing meaningless. Findings – The author finds that indeed the relation between speculative demand and hedging demand for options exists and strengthens after the consolidation of trading on NASDAQ and that hedging follows speculation. The fact that this relation exists is economically meaningful in that this is established for the first time empirically in support of the theoretical models predicting this relation's existence. Originality/value – Market participants on both the speculation side of the investment spectrum, such as hedge funds, and hedging side of the investment spectrum, such as mutual funds and money managers, would be interested in this topic and the findings of this paper. The main contribution of this study is in examining the relation between differential demand for options by using the non-parametric tools of spectral analysis. This helps extend the understanding of exchange traded funds' (ETF') option behavior and contributes to this strand of the ETF literature.

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DAVIS, MARK H. A., WALTER SCHACHERMAYER, and ROBERT G. TOMPKINS. "Installment Options and Static Hedging." Journal of Risk Finance 3, no. 2 (January 2002): 46–52. http://dx.doi.org/10.1108/eb043487.

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Aretz, Kevin, and Söhnke M. Bartram. "CORPORATE HEDGING AND SHAREHOLDER VALUE." Journal of Financial Research 33, no. 4 (December 2010): 317–71. http://dx.doi.org/10.1111/j.1475-6803.2010.01278.x.

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Seth, Rajiv, Valeed A. Ansari, and Manipadma Datta. "Weather‐risk hedging by farmers." Journal of Risk Finance 10, no. 1 (January 2, 2009): 54–66. http://dx.doi.org/10.1108/15265940910924490.

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Alghalith, Moawia, Christos Floros, and Ricardo Lalloo. "A note on dynamic hedging." Journal of Risk Finance 16, no. 2 (March 16, 2015): 190–96. http://dx.doi.org/10.1108/jrf-10-2014-0143.

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Purpose – The purpose of this paper is to empirically test dynamic hedging, using data from the FTSE-100 and Standard & Poor’s (S&P) 500 futures indices. Design/methodology/approach – The authors introduce a dynamic continuous-time hedging model in futures markets. The authors further relax the statistical-independence assumption between the spot price and basis risk. Findings – The authors show that the investors are, on average, quite risk averse. The authors find that a one unit increase in the price volatility reduces the hedged FTSE-100 (S&P 500) by 645.62 (777.07) units. Similarly, a one unit increase in basis risk reduces the hedged FTSE-100 (S&P 500) by 403.57 (378.54) units. The authors’ approach shows that risk-averse investors should decrease their hedge (i.e. increase their equity allocation) with an increase in index price risk. Practical implications – These findings are helpful to risk managers dealing with futures markets. Originality/value – The contribution of this paper is that it successfully introduces a dynamic continuous-time hedging model in futures markets.

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Nouajaa, Ghassen, and Jean-Laurent Viviani. "Residual foreign exchange risk: does CEO compensation matter?" Journal of Risk Finance 18, no. 5 (November 20, 2017): 581–600. http://dx.doi.org/10.1108/jrf-10-2016-0140.

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Purpose The purpose of this paper is to investigate whether CEO compensation scheme may induce some agency conflicts in the foreign exchange risk hedging policy. Design/methodology/approach Residual exposure is a post-hedging variable computed as the ratio of unrealized foreign exchange risk gains/losses to international sales. The authors follow the optimal hedging theory developed by Smith and Stulz (1985). The residual foreign exchange risk exposure is a way to capture some consequences of the managerial risk aversion, whereas the compensation scheme granted to CEO reveals that of the shareholders. The authors interpret any deviation to the predictions of this theory as a mark that some agency conflicts exist. Findings CEO compensation (stock-options, shares and so) significantly influence the level of the residual foreign exchange risk exposure. Both in-the-money exercisable options and shares are negatively related to the residual exposure of foreign exchange risk. The authors also document that the effect of agency problems is rather contingent because shares and options have especially a negative impact when the level of foreign exchange risk is relatively high. Originality/value The residual FX risk exposure variable the authors promote in this paper completes the traditional proxies used to depict the corporate hedging policy such as the nominal or total fair value of currency derivatives (Davies et al., 2006), use of nominal values (Spanò, 2007), use of fair values of derivatives and the fraction of production hedged (Wang and Fan, 2011). The information that it conveys differs significantly from the one provided by traditional proxies because it captures the year-end post hedging firm’s risk profile.

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Kyte, Abby. "The hedging imperative: making the choices." Balance Sheet 10, no. 2 (June 2002): 32–40. http://dx.doi.org/10.1108/09657960210697661.

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Wilson, Arlette, and Walter Campbell. "Enron’s hedging scheme: what went wrong?" Balance Sheet 11, no. 1 (March 2003): 27–31. http://dx.doi.org/10.1108/09657960310476845.

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Dark, Jonathan. "A Critique of Minimum Variance Hedging." Accounting Research Journal 18, no. 1 (July 2005): 40–49. http://dx.doi.org/10.1108/10309610580000674.

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Ioannides, Michalis, and Frank S. Skinner. "Hedging Corporate Bonds." Journal of Business Finance Accounting 26, no. 7&8 (September 1999): 919–44. http://dx.doi.org/10.1111/1468-5957.00280.

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Eckstein, Claire, Ariel Markelevich, and Alan Reinstein. "Accounting for derivative instruments and hedging activities (SFAS No. 133)." Review of Accounting and Finance 7, no. 2 (May 16, 2008): 131–49. http://dx.doi.org/10.1108/14757700810874119.

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Filipozzi, Fabio, and Kersti Harkmann. "Optimal currency hedge and the carry trade." Review of Accounting and Finance 19, no. 3 (August 24, 2020): 411–27. http://dx.doi.org/10.1108/raf-10-2018-0219.

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Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

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Arvanitis, Angelo, Jonathon Gregory, and Richard Martin. "Hedging Financial Risks Subject to Asymmetric Information." Journal of Risk Finance 1, no. 2 (January 2000): 9–18. http://dx.doi.org/10.1108/eb043441.

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Frestad, Dennis. "WHY MOST FIRMS CHOOSE LINEAR HEDGING STRATEGIES." Journal of Financial Research 32, no. 2 (June 2009): 157–67. http://dx.doi.org/10.1111/j.1475-6803.2009.01246.x.

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D’Amato, Valeria, Mariarosaria Coppola, Susanna Levantesi, Massimiliano Menzietti, and Maria Russolillo. "A longevity basis risk analysis in a joint FDM framework." Journal of Risk Finance 18, no. 1 (January 16, 2017): 55–75. http://dx.doi.org/10.1108/jrf-03-2016-0030.

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Purpose The improvements of longevity are intensifying the need for capital markets to be used to manage and transfer the risk through longevity-linked securities. Nevertheless, the difference between the reference population of the hedging instrument and the population of members of a pension plan, or the beneficiaries of an annuity portfolio, determines a significant heterogeneity causing the so-called basis risk. In particular, it is shown that if insurers use financial instruments based on national indices to hedge longevity risk, this hedge can become imperfect. For this reason, it is fundamental to arrange a model allowing to quantify the basis risk for minimising it through a correct calibration of the hedging instrument. Design/methodology/approach The paper provides a framework for measuring the basis risk impact on the. To this aim, we propose a model that measures the population basis risk involved in a longevity hedge, in the functional data model setting. hedging strategies. Findings The innovative contribution of the paper occurs in two key points: the modelling of mortality and the hedging strategy. Regarding the first point, the paper proposes a functional demographic model framework (FDMF) for capturing the basis risk. The FDMF model generally designed for single population combines functional data analysis, nonparametric smoothing and robust statistics. It allows to capture the variability of the mortality trend, by separating out the effects of several orthogonal components. The novelty is to set the FDMF for modelling the mortality of the two populations, the hedging and the exposed one. Regarding the second point, the basic idea is to calibrate the hedging strategy determining a suitable mixture of q-forwards linked to mortality rates to maximise the degree of longevity risk reduction. This calibration is based on the key q-duration intended as a measure allowing to estimate the price sensitivity of the annuity portfolio to the changes in the underlying mortality curve. Originality/value The novelty lies in linking the shift in the mortality curve to the standard deviation of the historical mortality rates of the exposed population. This choice has been determined by the observation that the shock in a mortality rate is age dependent. The main advantage of the presented framework is its strong versatility, being the functional demographic setting a generalisation of the Lee-Carter model commonly used in mortality forecasting, it allows to adapt to different demographic scenarios. In the next developments, we set out to compare other common factor models to assess the most effective longevity hedge. Moreover, the parsimony for considering together two trajectories of the populations under consideration and the convergence of long-term forecast are important aspects of our approach.

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Gumb, Bernard, Philippe Dupuy, Charles Richard Baker, and Véronique Blum. "The impact of accounting standards on hedging decisions." Accounting, Auditing & Accountability Journal 31, no. 1 (January 15, 2018): 193–213. http://dx.doi.org/10.1108/aaaj-03-2016-2448.

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Purpose The purpose of this paper is to study the effects of financial accounting standards on the economic decisions of managers. The primary research question addressed in the paper is whether the hedging behavior of corporate treasurers in France has been affected by the issuance of International Accounting Standard No. 39 and International Financial Reporting Standard No. 9 dealing with financial instruments and hedging. Design/methodology/approach In all, 48 semi-structured interviews were conducted with French corporate treasurers. The interview instrument is included as an exhibit to this paper. The interviews were recorded and transcribed. In addition, three interviews were conducted with representatives of Big 4 audit firms who are experts in accounting for financial instruments. The empirical findings are interpreted using a theoretical framework derived from Jean Baudrillard who argues that the “map” (accounting results) tends to define the “territory” (economic decision-making) in a period of “hyperreality” (when the underlying economic reality is confused). In other words, accounting standards, and the reported numbers that result from such standards, can influence the economic decisions of managers and not merely represent the outcome of economic decisions already taken. Findings Corporate treasurers often make decisions based on earnings impact. This finding is similar to findings in prior literature regarding the effects of accounting standards on economic decisions taken by managers. A fear of increased earnings volatility is central to the treasurers’ concerns. Also key is the complexity of the process for qualifying financial instruments for hedge accounting treatment. The authors also find that the behavior of corporate treasurers is neither stable nor homogeneous. The behavior appears to be the outcome of a collective learning process in which the corporate treasurer is only one actor. Research limitations/implications The type of qualitative research undertaken in this study has its limitations. It cannot be demonstrated that the findings are generalizable. There is a contextual specificity to the treasurer’s function, which reinforces a particular focus on accounting results. The CFO is simultaneously the superior of the treasurer and responsible for financial reporting, and consequently subject to a conflict of interest that does not necessarily apply to other types of managers. Therefore the findings cannot apply to all managerial functions. Practical implications The authors found that corporate treasurers focus on accrual-based earnings despite engaging in a function that is supposed to focus on cash flows. Even if the IASB believes that accounting standards should be used primarily by investors and creditors, they should acknowledge that there is a fear of earnings volatility by managers, and that there is an temptation toward increased use of other comprehensive income as an alternative to reporting volatile earnings numbers. Social implications The research provides support for those who argue that international accounting standards that require fair value accounting for financial instruments have had a negative pro-cyclical impact on the real economy. Originality/value This paper is a qualitative research study conducted in an area of research where there have previously been only quantitative studies. The access to a large number of French corporate treasurers is unique. The study supports prior findings regarding the influence of accounting standards on managerial behavior, but with an added theoretical interpretation related to Baudrillard’s arguments regarding the nature of the “map” and the “territory” in complex economic systems.

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Chernenko, Sergey, and Michael Faulkender. "The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps." Journal of Financial and Quantitative Analysis 46, no. 6 (June 1, 2011): 1727–54. http://dx.doi.org/10.1017/s0022109011000391.

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AbstractExisting cross-sectional findings on nonfinancial firms’ use of derivatives that are usually interpreted as the result of hedging may alternatively be due to speculation. Panel data examinations can distinguish between derivatives practices that endure over time and are therefore more likely to result from hedging, and those that are more transient, thus more consistent with speculation. Our decomposition results indicate that hedging of interest rate risk is concentrated among high-investment firms, consistent with costly external finance. Simultaneously, firms appear to use interest rate swaps to manage earnings and to speculate when their executive compensation contracts are more performance sensitive.

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Hagelin, Niclas, and Bengt Pramborg. "Hedging Foreign Exchange Exposure: Risk Reduction from Transaction and Translation Hedging." Journal of International Financial Management and Accounting 15, no. 1 (March 2004): 1–20. http://dx.doi.org/10.1111/j.1467-646x.2004.00099.x.

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Bucher, Melk C. "Conditional currency hedging." Financial Management 49, no. 4 (September 29, 2019): 897–923. http://dx.doi.org/10.1111/fima.12287.

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CAMPBELL, JOHN Y., KARINE SERFATY-DE MEDEIROS, and LUIS M. VICEIRA. "Global Currency Hedging." Journal of Finance 65, no. 1 (January 13, 2010): 87–121. http://dx.doi.org/10.1111/j.1540-6261.2009.01524.x.

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Choi, Jongmoo Jay, Connie X. Mao, and Arun D. Upadhyay. "Earnings Management and Derivative Hedging with Fair Valuation: Evidence from the Effects of FAS 133." Accounting Review 90, no. 4 (October 1, 2014): 1437–67. http://dx.doi.org/10.2308/accr-50972.

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ABSTRACT Barton (2001) and Pincus and Rajgopal (2002) show that earnings management through discretionary accruals and derivative hedging are partial substitutes in smoothing earnings before 1999. In this study, we investigate whether Financial Accounting Standard (FAS) 133 regarding hedge accounting in 2000 has influenced the relative merit of the two earnings-smoothing methods. Based on a sample of S&P 500 nonfinancial firms during 1996–2006, we find that the substitution relation between derivative hedging and discretionary accrual is significantly attenuated after FAS 133 implementation. We also document a significant increase in earnings volatility associated with derivative hedging post-FAS 133. These results are robust to the use of various model and method specifications, as well as controlling for contemporaneous macroeconomic and regulatory shocks. Overall, our results suggest that a material change in an accounting rule regarding derivatives can influence the level and volatility of reported earnings, as well as the method of income smoothing. JEL Classifications: G32; M41; M48

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Dzingirai, Canicio, and Nixon S. Chekenya. "Longevity swaps for longevity risk management in life insurance products." Journal of Risk Finance 21, no. 3 (June 27, 2020): 253–69. http://dx.doi.org/10.1108/jrf-05-2019-0085.

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Purpose The life insurance industry has been exposed to high levels of longevity risk born from the mismatch between realized mortality trends and anticipated forecast. Annuity providers are exposed to extended periods of annuity payments. There are no immediate instruments in the market to counter the risk directly. This paper aims to develop appropriate instruments for hedging longevity risk and providing an insight on how existing products can be tailor-made to effectively immunize portfolios consisting of life insurance using a cointegration vector error correction model with regime-switching (RS-VECM), which enables both short-term fluctuations, through the autoregressive structure [AR(1)] and long-run equilibria using a cointegration relationship. The authors also develop synthetic products that can be used to effectively hedge longevity risk faced by life insurance and annuity providers who actively hold portfolios of life insurance products. Models are derived using South African data. The authors also derive closed-form expressions for hedge ratios associated with synthetic products written on life insurance contracts as this will provide a natural way of immunizing the associated portfolios. The authors further show how to address the current liquidity challenges in the longevity market by devising longevity swaps and develop pricing and hedging algorithms for longevity-linked securities. The use of a cointergrating relationship improves the model fitting process, as all the VECMs and RS-VECMs yield greater criteria values than their vector autoregressive model (VAR) and regime-switching vector autoregressive model (RS-VAR) counterpart’s, even though there are accruing parameters involved. Design/methodology/approach The market model adopted from Ngai and Sherris (2011) is a cointegration RS-VECM for this enables both short-term fluctuations, through the AR(1) and long-run equilibria using a cointegration relationship (Johansen, 1988, 1995a, 1995b), with a heteroskedasticity through the use of regime-switching. The RS-VECM is seen to have the best fit for Australian data under various model selection criteria by Sherris and Zhang (2009). Harris (1997) (Sajjad et al., 2008) also fits a regime-switching VAR model using Australian (UK and US) data to four key macroeconomic variables (market stock indices), showing that regime-switching is a significant improvement over autoregressive conditional heteroscedasticity (ARCH) and generalised autoregressive conditional heteroscedasticity (GARCH) processes in the account for volatility, evidence similar to that of Sherris and Zhang (2009) in the case of Exponential Regressive Conditional Heteroscedasticity (ERCH). Ngai and Sherris (2011) and Sherris and Zhang (2009) also fit a VAR model to Australian data with simultaneous regime-switching across many economic and financial series. Findings The authors develop a longevity swap using nighttime data instead of usual income measures as it yields statistically accurate results. The authors also develop longevity derivatives and annuities including variable annuities with guaranteed lifetime withdrawal benefit (GLWB) and inflation-indexed annuities. Improved market and mortality models are developed and estimated using South African data to model the underlying risks. Macroeconomic variables dependence is modeled using a cointegrating VECM as used in Ngai and Sherris (2011), which enables both short-run dependence and long-run equilibrium. Longevity swaps provide protection against longevity risk and benefit the most from hedging longevity risk. Longevity bonds are also effective as a hedging instrument in life annuities. The cost of hedging, as reflected in the price of longevity risk, has a statistically significant effect on the effectiveness of hedging options. Research limitations/implications This study relied on secondary data partly reported by independent institutions and the government, which may be biased because of smoothening, interpolation or extrapolation processes. Practical implications An examination of South Africa’s mortality based on industry experience in comparison to population mortality would demand confirmation of the analysis in this paper based on Belgian data as well as other less developed economies. This study shows that to provide inflation-indexed life annuities, there is a need for an active market for hedging inflation in South Africa. This would demand the South African Government through the help of Actuarial Society of South Africa (ASSA) to issue inflation-indexed securities which will help annuities and insurance providers immunize their portfolios from longevity risk. Social implications In South Africa, there is an infant market for inflation hedging and no market for longevity swaps. The effect of not being able to hedge inflation is guaranteed, and longevity swaps in annuity products is revealed to be useful and significant, particularly using developing or emerging economies as a laboratory. This study has shown that government issuance or allowing issuance, of longevity swaps, can enable insurers to manage longevity risk. If the South African Government, through ASSA, is to develop a projected mortality reference index for South Africa, this would allow the development of mortality-linked securities and longevity swaps which ultimately maximize the social welfare of life assurance policy holders. Originality/value The paper proposes longevity swaps and static hedging because they are simple, less costly and practical with feasible applications to the South African market, an economy of over 50 million people. As the market for MLS develops further, dynamic hedging should become possible.

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Kulatilaka, Nalin, and Alan J. Marcus. "Hedging Foreign Project Risk." Journal of International Financial Management & Accounting 5, no. 2 (June 1994): 142–56. http://dx.doi.org/10.1111/j.1467-646x.1994.tb00039.x.

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Geyer, Alois, and Walter Schwaiger. "Delta Hedging bei stochastischer Volatilität in diskreter Zeit." Financial Markets and Portfolio Management 15, no. 1 (March 2001): 94–103. http://dx.doi.org/10.1007/s11408-001-0107-1.

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Zou, Hong, Mike Adams, and Jason Zezhong Xiao. "DOES BOARD INDEPENDENCE MATTER FOR CORPORATE INSURANCE HEDGING?" Journal of Financial Research 35, no. 3 (September 2012): 451–69. http://dx.doi.org/10.1111/j.1475-6803.2012.01324.x.

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Alghalith, Moawia. "Simultaneous output and input hedging: a decision analysis." Journal of Risk Finance 9, no. 2 (February 29, 2008): 200–205. http://dx.doi.org/10.1108/15265940810853940.

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Baxter, Martin. "Hedging in Financial Markets." ASTIN Bulletin 28, no. 1 (May 1998): 5–16. http://dx.doi.org/10.2143/ast.28.1.519076.

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AbstractThis (mostly) expository paper describes the importance of hedging to the pricing of modern financial products and how hedging may be achieved even when the traditional Black-Scholes assumptions are absent.

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Shanker, Latha. "Margin Requirements and Hedging Effectiveness: An Analysis in a Risk-Return Framework." Journal of Accounting, Auditing & Finance 7, no. 3 (July 1992): 379–93. http://dx.doi.org/10.1177/0148558x9200700311.

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The wave of innovation that swept the field of finance in the last fifteen years has resulted in the creation of different instruments that could serve effectively as substitutes in performing different functions. One important function, that of hedging risk, may be performed by futures and options. The regulations of the markets in which these instruments trade are important determinants of the competitiveness of the different substitutes. One such important regulation is that of the margin requirement of futures and options markets. This paper studies the effect of an increase in the margin requirement on the hedging effectiveness of the hedging instrument and its demand by the hedger. Empirically, the paper compares the hedging effectiveness of currency options and futures with and without margin inclusion. The results indicate that margin regulations for these two instruments are such that the instruments are competitive in terms of what they offer the hedger.

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Dye, Ronald A., and Sri S. Sridhar. "Hedging Executive Compensation Risk through Investment Banks." Accounting Review 91, no. 4 (September 1, 2015): 1109–38. http://dx.doi.org/10.2308/accr-51291.

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ABSTRACT Allowing CEOs to hedge the risk in the compensation contracts their firms give them has been controversial because such hedging allows the executives to undo some of the incentive effects of those contracts; it also results in a divergence between the compensation firms pay their senior executives and the compensation those executives effectively receive. We analyze these personal hedging activities of CEOs and identify when firms may gain or lose by allowing or prohibiting such hedging. We also describe variations in CEOs' demands for various compensation hedges, and how firms will restructure their CEOs' compensation contracts in anticipation that the CEOs will engage in such hedging.

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FÖLLMER, H., and M. SCHWEIZER. "Hedging by Sequential Regression." ASTIN Bulletin 19, no. 3 (November 1, 1989): 29–42. http://dx.doi.org/10.2143/ast.19.3.2014900.

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38

Merrick, John J. "Hedging with Mispriced Futures." Journal of Financial and Quantitative Analysis 23, no. 4 (December 1988): 451. http://dx.doi.org/10.2307/2331083.

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Engle, Robert F., Stefano Giglio, Bryan Kelly, Heebum Lee, and Johannes Stroebel. "Hedging Climate Change News." Review of Financial Studies 33, no. 3 (February 14, 2020): 1184–216. http://dx.doi.org/10.1093/rfs/hhz072.

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Abstract We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk.

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Ortiz, Carlos E., Charles A. Stone, and Anne Zissu. "Delta hedging of mortgage‐servicing portfolios under gamma constraints." Journal of Risk Finance 9, no. 4 (August 15, 2008): 379–90. http://dx.doi.org/10.1108/15265940810895034.

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Chance, Don M., M. Wayne Marr, and G. Rodney Thompson. "Hedging shelf registrations." Journal of Futures Markets 6, no. 1 (1986): 11–27. http://dx.doi.org/10.1002/fut.3990060103.

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Wolf, Avner, Mark Castelino, and Jack Clark Francis. "Hedging mispriced options." Journal of Futures Markets 7, no. 2 (April 1987): 147–56. http://dx.doi.org/10.1002/fut.3990070205.

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Spanò, Marcello. "Managerial Ownership and Corporate Hedging." Journal of Business Finance & Accounting 34, no. 7-8 (September 2007): 1245–80. http://dx.doi.org/10.1111/j.1468-5957.2007.02024.x.

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Biagini, Francesca, Thorsten Rheinländer, and Jan Widenmann. "HEDGING MORTALITY CLAIMS WITH LONGEVITY BONDS." ASTIN Bulletin 43, no. 2 (May 2013): 123–57. http://dx.doi.org/10.1017/asb.2013.12.

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AbstractWe study mean–variance hedging of a pure endowment, a term insurance and general annuities by trading in a longevity bond with continuous rate payments proportional to the survival probability. In particular, we discuss the introduction of a gratification annuity as an interesting insurance product for the life insurance market. The optimal hedging strategies are determined via their Galtchouk–Kunita–Watanabe decompositions under specific, yet sufficiently general model assumptions. The results are then further illustrated by assuming a general affine structure of the mortality intensity process. The optimal hedging strategies as well as the residual hedging error of a gratification annuity and a simple life annuity are finally investigated with numerical simulations, which illustrate the nice features of the gratification annuity for the insurance industry.

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Zhu, Wenjun, Ken Seng Tan, Lysa Porth, and Chou-Wen Wang. "SPATIAL DEPENDENCE AND AGGREGATION IN WEATHER RISK HEDGING: A LÉVY SUBORDINATED HIERARCHICAL ARCHIMEDEAN COPULAS (LSHAC) APPROACH." ASTIN Bulletin 48, no. 02 (April 26, 2018): 779–815. http://dx.doi.org/10.1017/asb.2018.6.

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AbstractAdverse weather-related risk is a main source of crop production loss and a big concern for agricultural insurers and reinsurers. In response, weather risk hedging may be valuable, however, due to basis risk it has been largely unsuccessful to date. This research proposes the Lévy subordinated hierarchical Archimedean copula model in modelling the spatial dependence of weather risk to reduce basis risk. The analysis shows that the Lévy subordinated hierarchical Archimedean copula model can improve the hedging performance through more accurate modelling of the dependence structure of weather risks and is more efficient in hedging extreme downside weather risk, compared to the benchmark copula models. Further, the results reveal that more effective hedging may be achieved as the spatial aggregation level increases. This research demonstrates that hedging weather risk is an important risk management method, and the approach outlined in this paper may be useful to insurers and reinsurers in the case of agriculture, as well as for other related risks in the property and casualty sector.

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Taylor, D., and W. van Zyl. "Hedging employee stock options and the implications for accounting standards." Investment Analysts Journal 37, no. 67 (January 2008): 29–36. http://dx.doi.org/10.1080/10293523.2008.11082497.

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Koutmos, Gregory, and Andreas Pericli. "Hedging GNMA Mortgage-Backed Securities with T-Note Futures: Dynamic versus Static Hedging." Real Estate Economics 27, no. 2 (June 1999): 335–63. http://dx.doi.org/10.1111/1540-6229.00776.

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Riesner, Martin. "Locally Risk-minimizing Hedging of Insurance Payment Streams." ASTIN Bulletin 37, no. 1 (May 2007): 67–91. http://dx.doi.org/10.2143/ast.37.1.2020799.

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For the martingale case Föllmer and Sondermann (1986) introduced a unique admissible risk-minimizing hedging strategy for any square-integrable contingent claim H. Schweizer (1991) developed their theory further to the semimartingale case introducing the notion of local risk-minimization. Møller (2001) extended the theory of Föllmer and Sondermann (1986) to hedge general payment processes occurring mainly in insurance. We expand local risk-minimization to the theory of hedging general payment processes and derive such a hedging strategy for general unit-linked life insurance contracts in a general Lévy process financial market.

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LINDSET, SNORRE. "Discontinuous Hedging Strategies for Multi‐period Guarantees in Life Insurance." Journal of Risk Finance 5, no. 1 (April 2003): 51–63. http://dx.doi.org/10.1108/eb022979.

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Kharbanda, Varuna, and Archana Singh. "Hedging and effectiveness of Indian currency futures market." Journal of Asia Business Studies 14, no. 5 (February 14, 2020): 581–97. http://dx.doi.org/10.1108/jabs-10-2018-0279.

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Purpose The purpose of this paper is to measure the effectiveness of the hedging with futures currency contracts. Measuring the effectiveness of hedging has become mandatory for Indian companies as the new Indian accounting standards, Ind-AS, specify that the effectiveness of hedges taken by the companies should be evaluated using quantitative methods but leaves it to the company to choose a method of evaluation. Design/methodology/approach The paper compares three models for evaluating the effectiveness of hedge – ordinary least square (OLS), vector error correction model (VECM) and dynamic conditional correlation multivariate GARCH (DCC-MGARCH) model. The OLS and VECM are the static models, whereas DCC-MGARCH is a dynamic model. Findings The overall results of the study show that dynamic model (DCC-MGARCH) is a better model for calculating the hedge effectiveness as it outperforms OLS and VECM models. Practical implications The new Indian accounting standards (Ind-AS) mandates the calculation of hedge effectiveness. The results of this study are useful for the treasurers in identifying appropriate method for evaluation of hedge effectiveness. Similarly, policymakers and auditors are benefitted as the study provides clarity on different methods of evaluation of hedging effectiveness. Originality/value Many previous studies have evaluated the efficiency of the Indian currency futures market, but with rising importance of hedging in the Indian companies, Reserve Bank of India’s initiatives and encouragement for the use of futures for hedging the currency risk and now the mandatory accounting requirement for measuring hedging effectiveness, it has become more relevant to evaluate the effectiveness of hedge. To the authors’ best knowledge, this is one of the first few papers which evaluate the effectiveness of the currency future hedging.

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Journal articles on the topic 'Hedging (Finance) – Accounting'

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