...Hedging involves taking an offsetting position in a derivative in order to balance any gains or losses to the underlying asset (Sargeant, 2014). Most companies in existence today do this (futures contract) to keep interest rates and other prices stable in case they do go up. For instance, a company that makes doughnuts might by its raw materials (sugar and flour) at an established price with its supplier set for a certain amount of time, which is probably six months to a year, and an airline company might set up bids with fuel companies to purchase jet fuel at a price set for a year, keeping airfares as low as possible. Most investors and analysts view interest rates as today’s biggest threat to the stock market. Mostly rising interest because higher interest makes riskier assets less attractive yet they make less risky assets more attractive (Gad, 2013). Bud Haslett, head of risk management and derivatives for the CFA Institute, mentions that derivatives can decrease risk substantially if used properly to hedge risk exposures but if used improperly, many problems can be caused. Mr. Haslett also mentions how companies that hedge against price or rate fluctuations have the advantage of more consistent cash flow (Brin, 2011). Speculators make bets or guesses on where they hope or think the market is headed. If they believe a stock may be overpriced, they might possibly short sell that stock and wait for the price to hopefully decline so they can buy the stock back to receive...
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...Bootstrapping (statistics) From Wikipedia, the free encyclopedia In statistics, bootstrapping is a method for assigning measures of accuracy (defined in terms of bias, variance, confidence intervals, prediction error or some other such measure) to sample estimates.[1][2] This technique allows estimation of the sampling distribution of almost any statistic using only very simple methods.[3][4] Generally, it falls in the broader class of resampling methods. Bootstrapping is the practice of estimating properties of an estimator (such as its variance) by measuring those properties when sampling from an approximating distribution. One standard choice for an approximating distribution is the empirical distribution of the observed data. In the case where a set of observations can be assumed to be from an independent and identically distributed population, this can be implemented by constructing a number of resamples of the observed dataset (and of equal size to the observed dataset), each of which is obtained by random sampling with replacement from the original dataset. It may also be used for constructing hypothesis tests. It is often used as an alternative to inference based on parametric assumptions when those assumptions are in doubt, or where parametric inference is impossible or requires very complicated formulas for the calculation of standard errors. Contents * 1 History * 2 Approach * 3 Situations where bootstrapping is useful * 4 Discussion * 4.1 Advantages...
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...Содержание 1. Общая характеристика валютных операций 2. Классификация валютных рисков 3. Методы управления трансляционными валютными рисками 1. Общая характеристика валютных операций Под валютными рисками понимается вероятность возникновения убытков от изменения обменных курсов в процессе внешнеэкономической деятельности, инвестиционной деятельности в других странах, а также при получении экспортных кредитов. Валютный, или курсовой риск — это вероятность того, что изменения курсов иностранных валют (доллара, фунтов стерлингов, франка, йены и т. д.) приводят к появлению у банка убытков вследствие изменения рыночной стоимости его активов и пассивов. В 1970-80-х годах наблюдались гораздо более резкие колебания обменных курсов валют и процентных ставок, чем в предыдущие периоды. После краха Бреттон-Вудской валютной системы в начале 1970-х годов, которая была заменена системой плавающих валютных курсов, стали появляться первые попытки управления валютным риском. Амплитуда колебаний валютных курсов в 1980-х годах увеличилась. Другим серьезным ударом по экономике в этот период был рост процентных ставок. Вместе взятые: плавающий валютный курс и изменяющиеся процентные ставки привели экономистов и банкиров к более тщательному анализу по управлению валютного риска. Важно установить наличие валютного риска при сделке и выяснить, как этот риск может быть покрыт. Валютная ставка может изменяться как в пользу продавца, так и в пользу покупателя, и это нельзя игнорировать. ...
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...Fuel Hedging in the Airline Industry: The Case of Southwest Airlines Executive Summary From December 21, 1998 to September 11, 2000, jet fuel prices increased 255%, from 28.50 cents/gallon to 101.25 cents/gallon. While jet fuel prices have declined from their highs, at a price of 79.45 cents/gallon, they are still significantly above the December 1998 lows. With the future price of jet fuel being unpredictable, Southwest has decided to implement a trading strategy in an effort to mitigate its exposure to adverse price movements in jet fuel. To do this, Southwest has settled on 5 possible strategies: (1)Do nothing; (2) Hedge using plain vanilla jet fuel or heating oil swap; (3) Hedge using options; (4) Hedge using a zero-cost collar strategy; or (5) Hedge using a crude oil or heating oil futures contract. The merits and demerits of each strategy are discussed in depth below. After evaluating the possible scenarios, it is our recommendation that Southwest implement a hedging strategy that involves a combination of the jet fuel swap and the heating oil swap. The combined strategy will allow Southwest to achieve the lowest net jet fuel costs, while limiting the risks associated with the strategies individually, such as counterparty risk for the jet fuel swap and basis risk for the heating oil swap. Concerning the split between the two strategies, a 50/50 even split is recommended. Why Hedge? Hedging is a financial strategy that enables airlines or other investors...
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...International Journal of Energy Economics and Policy Vol. 3, No. 1, 2013, pp.51-59 ISSN: 2146-4553 www.econjournals.com An Investigation of Some Hedging Strategies for Crude Oil Market Andre Assis de Salles Industrial Engineering Department Polytechnic School, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil. Email: as@ufrj.br ABSTRACT: This paper examines the performance of bivariate volatility models for the crude oil spot and future returns of the WTI type barrel prices. Besides the volatility of spot and future crude oil barrel returns time series, the hedge ratio strategy is examined through the hedge effectiveness. Thus this study shows hedge strategies built using methodologies applied in the variance modelling of returns of crude oil prices in the spot and future markets, and covariance between these two market returns, which correspond to the inputs of the hedge strategy shown in this work. From the studied models the bivariate GARCH in a Diagonal VECH and BEKK representations was chosen, using three different models for the mean: a bivariate autoregressive, a vector autoregressive and a vector error correction. The methodologies used here take into consideration the denial of assumptions of homoscedasticity and normality for the return distributions making them more realistic. Keywords: Volatility Models; Future Markets; Hedge Ratio; Hedge Effectiveness; Crude Oil Market JEL Classifications: C32; G15; Q40 1. Introduction All countries consume crude...
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...Derivatives and Hedging Over recent years, the volatility in the financial markets has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are...
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...Currency Hedging When companies conduct business across borders, they must deal in foreign currencies. Companies must exchange foreign currencies for home currencies when dealing with receivables, and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavorably before payment is made or received in the currency . For example, if a United States company doing business in Japan is compensated in yen, that company has risk associated with fluctuations in the value of the yen versus the United States dollar.[1] ------------------------------------------------- Hedge[edit] A hedge is a type of derivative, or a financial instrument, that derives its value from an underlying asset. Hedging is a way for a company to minimize or eliminate foreign exchange risk. Two common hedges are forward contracts and options. A forward contract will lock in an exchange rate today at which the currency transaction will occur at the future date.[2] An option sets an exchange rate at which the company may choose to exchange currencies. If the current exchange rate is more favorable, then the company will not exercise this option.[2] The main difference between the hedge methods is who derives the benefit of a favourable movement in the exchange rate. With a forward contract the other party derives the benefit, while with an option the company retains the benefit by choosing not to exercise...
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...2143) - These are the gains and losses that arise when the assets and liabilities of a MNC’s foreign subsidiary are translated back into the MNC’s reporting currency for the purposes of preparing consolidated financial statements. Exhibit 9 shows the Transaction exposures of CAD faced by General Motors Canada in 2001. The cash inflows amount to C$ 11,613 millions and the outflows amount to C$ 13,294 millions. Thus the deficit being C$ 1682 millions. Exhibit 10 indicates the translation exposures of CAD. The liabilities outweigh the assets of General Motors Canada. Liability of GM is C$ 4739 millions, whereas the assets amount to C$ 2597 millions. So, there is a translation exposure of C$ 2143 millions. General Motors used a passive hedging policy and decided...
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...The data sources for historical spot and futures prices on crude oil and refined products are available at http://www.eia.gov/petroleum/data.cfm (click on “Prices”), and current oil futures price data are available at http://www.cmegroup.com/trading/energy/. While much of the basic ideas surrounding these projects come from Chapter 10 of the textbook, class discussions will involve deeper coverage than that posed in the textbook. I will be looking for evidence in your reports that you have been paying attention in class. Failure to provide such evidence will result in lower or possibly failing grades on the written report. Description of assignment: Underlying information for assignment: The basic scenario: You work for a major US airline, VUL Air, in its fuel purchasing department. During December 2015, your boss, the VP of fuel purchasing for VUL, purchased 2,700 March 2016 light sweet crude oil contracts traded on the CME’s NYMEX exchange to partially hedge the company’s anticipated February 2016 jet fuel consumption of 116 million gallons. The weighted average price of crude oil futures contracts purchased on the NYMEX during December 14 – 18, 2015, was $38.18 per barrel. Your boss has presented you with the plan for liquidating the 2,700 crude oil futures contracts during February 2016. In fact, you have been provided with a spreadsheet template (see “General Files” in the course D2L page) that shows the plan for liquidating the futures contracts (see column...
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...[pic] HOMEWORK Almaty 2012 Part 1: Option market On March 21, 2012 we took a short position in the close at the money April 2012 call option on ETF Spider. Option’s strike price is 140 and initial spot price is 139.53. 1.71$ was paid for this call option. At the same time short position in the close at the money June 2012 put option was taken. ETF Spider’s strike and initial spot prices are the same and 4.05$ was paid for put option. Daily profits and losses were calculated applying the formula and are seen in the table. SPY options were closed out on 3 April, 2012 (after 10 observations were observed) with call price - 2.8 and put price - 3.35. Начало формы SPDR Options - Contract Specifications Symbol: SPY Underlying: Generally, 100 shares of Standard & Poor's Depositary Receipts® (known as "SPDRs"). Strike Price Intervals: Strike prices are set at a minimum of 1-point increments. Strike (Exercise) Prices: In-, at- and out-of-the-money strike prices are initially listed. New series generally will be added when the underlying shares trade through the highest or lowest strike price available. Premium Quote: Stated in decimals. One point equals $100. Minimum tick for options trading below 3.00 is 0.05 ($5.00) and for all other series, 0.10 ($10.00). Expiration Date: Saturday immediately following the third Friday of the expiration...
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...ISSN 1836-8123 Hedging With Futures Contract: Estimation and Performance Evaluation of Optimal Hedge Ratios in the European Union Emissions Trading Scheme John Hua Fan, Eduardo Roca and Alexandr Akimov No. 2010-09 Series Editor: Dr. Alexandr Akimov Copyright © 2010 by author(s). No part of this paper may be reproduced in any form, or stored in a retrieval system, without prior permission of the author(s). Hedging With Futures Contract: Estimation and Performance Evaluation of Optimal Hedge Ratios in the European Union Emissions Trading Scheme John Hua Fan, Eduardo Roca and Alexandr Akimov Department of Accounting, Finance and Economics, Griffith University, Queensland, Australia 4111 Abstract Following the introduction of the European Union Emissions Trading Scheme, CO2 emissions have become a tradable commodity. As a regulated party, emitters are forced to take into account the additional carbon emissions costs in their production costs structure. Given the high volatility of carbon price, the importance of price risk management becomes unquestioned. This study is the first attempt to calculate hedge ratios and to investigate their hedging effectiveness in the EU-ETS carbon market by applying conventional and recently developed models of estimation. These hedge ratios are then compared with those derived for other markets. In spite of the uniqueness and novelty of the carbon market, the results of the study are consistent with those found in other markets...
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...Introduction 1. “Hedging” Defined 2. The Hedging Process 1. The Fuel Hedging Decision-making 2. Steps in the Hedging Process 3. Different types of Hedging Strategies 4. The Accounting Aspects of Hedging 5. Formula used in the Spot Pricing of Jet Fuel 3. Pros and Cons Arguments of Hedging Jet Fuel 4. Risk Factors that may affect the Hedging of Jet Fuel. 5. Conclusion 6. Data Analysis, Graphics and Tables 7. Bibliography Introduction The hedging of jet fuel by major airlines is the topic of this project. Hedging is considered by some as a form of insurance, similar to the kind you buy for your personal use (health, life, auto) or for your business (fire, flood, cargo). The process of hedging fuel and its derivatives is far more complicated than going out to buy a homeowner’s insurance policy, for example. We will address the different types of hedging strategies that can and are being implemented by some of the major global carriers and we will also take a look at those carriers who do not practice hedging at all. Hedging allows airlines to “insure” themselves against a negative event, such as a sharp rise in fuel prices due to a shortage in oil production. Hedging is simply a way that some airlines use to try and reduce the uncertainty and volatility of jet fuel prices. For example, if a major airline is currently generating a profit, they can try to protect that profit by hedging their fuel needs and...
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...FA06: Hedging (Exercises) FA06 Hedging: Exercises Exercise 1 – Hedging of an exposed receivable with a forward contract (no hedge accounting) Canuck Co., a Canadian public company, received an order for hockey sticks on October 1, 2013. Canuck sold hockey sticks to Eagle Co. for US $100,000 on November 1, 2013, with payment to be received on February 1, 2014. On November 1, Canuck Co. entered into a contract to deliver US $100,000 in exchange for Canadian dollars on February 1, 2014. Canuck has a December 31 year-end. Relevant exchange rates were as follows: Date October 1, 2013 November 1, 2013 December 31, 2013 February 1, 2014 Spot Rate 1.00 USD = 0.98 CAD 1.00 USD = 0.97 CAD 1.00 USD = 0.95 CAD 1.00 USD = 0.99 CAD Forward rate (for delivery of $100,000 USD on February 1, 2014) 1.00 USD = 0.94 CAD 1.00 USD = 0.91 CAD 1.00 USD = 0.96 CAD - Required: Prepare all journal entries for Canuck Co. for 2013 and 2014 relating to this transaction, using the “net method.” 2/5 FA06 Hedging: Exercises Exercise 2 – Hedging of an exposed payable with term deposit (no hedge accounting) On November 1, 2013, Steven Inc. (Steven), a Canadian company with a December 31 yearend, purchased new machinery from a foreign supplier at a cost of 400,000 FCU. The amount is due on January 31, 2014. To hedge the risk associated with the transaction, on November 1, 2013, Steven invested in a 400,000 FCU term deposit, maturing on January 31, 2014. The interest...
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...The American Institute for Foreign Study (AIFS) is an organization, which helps enable American students to travel abroad. The main service AIFS provides entails organizing educational and cultural exchange problems across the globe. As the case explains, AIFS has split their business into two major divisions that that serve American student’s studying abroad; the Study Abroad College division and the High School Travel division. The college division, which is controlled by Christopher Archer-Lock, sends American students all over the world on semester-long exchange programs. The high school division, which was founded as the American Council for International Studies (ACIS), is controlled by Becky Tabaczynski and sends high school students and their teachers on 1-4 week long trips. This nature of business involves a certain amount of bottom-line risk. AIFS focuses largely on American students studying abroad, therefore the majority of their revenue is in American Dollars (USD). However, AIFS costs’ are generally incurred in foreign currency (primarily Euros (EUR) and British Pounds (GBP)) because the services they arrange for happen abroad. Due to their business activities involving foreign currencies, an unfavorable change in the exchange rate could result in a higher cost base, and potentially a loss overall if the change is significant enough. Inherently, due to the nature of their business, AIFS is exposed to currency risk because they are dealing in multiple currencies...
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...housing’s inflation hedge capabilities. Mixed and varied empirical results have been demonstrated in Switzerland (Hamelink and Hosli, 1996), Canada (Newell, 1995), Hong Kong (Ganesan and Chiang, 1998), Singapore (Sing and Low, 2000) and China (Chu and Sing, 2004). Chen and Sing (2006) examined the inflation-hedging ability of five international housing markets (namely Hong Kong, Tokyo, Singapore, Taipei and London). Their results show that the inflation-hedging features of housing vary significantly across different markets. This finding also highlights the importance of international evidence on the inflation-hedging effectiveness of housing. In Malaysia, the inflation-hedging effectiveness of residential property has been largely ignored, although there are some studies in housing portfolio management (Hui, 2010; Lee and Ting, 2011). In addition, no study has been undertaken to compare the inflation-hedging attributes of different types of residential property. Given the unique features of the Malaysian housing market, a dedicated study in this market is critical. Inflation-hedging characteristics 65 4. Data and methodology Data To assess the inflation-hedging features of Malaysian residential property, the quarterly Malaysian housing indices from the Valuation and Property Services Department, Malaysia over 1999:Q1-2012:Q1 were obtained. The Malaysian All House Price Index was used to represent the performance of all houses in Malaysia. Moreover, the Malaysian...
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