Derivative Instruments Research Articles

Decision Analysis on Operation of Commercial Banks Based on the Application of Credit CDS

Affected by the new crown epidemic, it is difficult for Chinese small and medium-sized enterprises to ensure the normal operation of the industrial chain in terms of business operation and development, which may lead to the inability to repay their loans in commercial banks in time, triggering credit default incidents. CDS is a new credit derivative instrument, which can alleviate the default risk held by creditors to a certain extent and enhance the trust of both borrowers and lenders. This paper tries to apply the CDS mechanism to the Chinese market, using the TOPSIS model to score some companies, and explore what types of corporate loans commercial banks need to use CDS products for risk mitigation. It is found that enterprises with poor profitability, small development prospects, high credit risk and weak solvency need to pay special attention to bank loans.

Investigating the Impact of Derivatives on Stability in the Financial Performance of the Banking Sector of Pakistan

Purpose: The aim of the paper is twofold, to contribute to the ongoing debate regarding highlighting the determinants of derivative usage by commercial banks specifically from a dual banking economy perspective, and to discuss the influence of derivatives usage on the value and stability in the financial performance of the banking sector of Pakistan.
 Design/Methodology/Approach: The study used the Z-Score and CAMELS Index to compare the stability analysis from different dimensions. Further, the impact of bank-controlled variables on the use of derivatives has also been analyzed.
 Findings: By conducting Panel regression models, the results revealed that derivatives used by banks reduce the profitability and ultimately stability of banking and increase the bank-specific risk.
 Implications/Originality/Value: These findings point towards serious intentions regarding using derivative instruments in an economy where dual banking is practiced.

DETERMINANTS OF FOREIGN CURRENCY HEDGING AND IT’S IMPACT ON FIRM VALUE

<p>Hedging through derivative instruments is a risk management action to reduce losses due to foreign exchange exposure. This research aims to examine the influence of liquidity, company size, leverage, growth opportunity, financial distress, profitability on company hedging decisions and to find out whether hedging activities have an effect on company value. The research sample consisted of 39 companies in the basic industry and chemical goods sector listed on the Indonesia Stock Exchange in 2014-2018. This research uses two stages of testing to analyze the data. The first stage uses logistic regression to test decision determinants hedging company. The second stage uses testing Independent Sample T-Test to determine the impact of activities hedging on company value and knowing which groups of companies have superior value. The research results show that leverage, company size and growth opportunity have a positive effect on the probability of a company's hedging decisions. Meanwhile, financial distress, liquidity and profitability have a negative effect on the probability of a company's hedging decisions. There is a significant difference in the average value between companies that carry out hedging activities and companies that do not carry out hedging activities.</p>

Kebijakan Lindung Nilai (Hedging) pada Perusahaan untuk Menjamin Kinerja Perusahaan

Risk fluctuations, including such changes in interest rates, exchange rates, and commodity prices, have a negative impact on business performance and can be mitigated by hedging. Derivative instruments are the preferred method for hedging. Internal hedging calculations take into account size, growth prospects, financial distress, leverage, and liquidity. This study's goal is to examine the variables that influence the hedging decisions of businesses. This study employs a descriptive qualitative methodology. The most influential factors in determining a company's hedging strategy are its size and growth prospects, according to the research. The greatest effect comes from the company's size and growth potential in order to influence the company's hedging policies. Other factors such as leverage, liquidity, financial distress, market depth risk are not so dominant in influencing the company's hedging decisions. However, several variables or factors that are not the dominant factor will be important according to the industry or line of business of each company.Recommendations for further research can be carried out by analyzing the company's external factors that influence hedging decisions.

Transaksi Derivatif Lindung Nilai (Hedging) Pada PT. Krakatau Steel (Persero) Tbk

The purpose of this research is to learn more about PT Krakatau Steel (Persero) Tbk's (the company under investigation) use of derivative hedging transactions. In this study, content analysis was applied as a qualitative methodology. The 2020 financial statements are the data source for this study. According to the data, PT Krakatau Steel (Persero) Tbk makes use of derivative instruments as a form of risk management. Swaps, spot trades, forward contracts, and options are all examples of derivative transactions. The corporation also employs derivative instruments to reduce exposure to uncertainty. Due to the size of its operations, PT Krakatau Steel (Persero) Tbk is a prime candidate for the usage of derivative instruments. Companies of PT Krakatau Steel (Persero) Tbk's size typically have the financial resources to incur all the costs necessary to use derivatives in order to reap the economic benefits they provide. The hedging effect is expected by the company to be able to mitigate exchange rate risks and price fluctuations. Therefore, hedging can make it easier for companies to make funding plans and buying and selling transactions carried out by companies.

The implications of firms' derivative usage on the frequency and usefulness of management earnings forecasts

AbstractWe investigate how firms' use of derivatives impacts voluntary disclosure and offer four main findings. First, we find that when firms begin using derivative instruments, they increase the frequency of management earnings forecasts. Second, using path analysis, we find a direct link between derivative usage and forecast frequency, as well as an indirect link through reduced earnings volatility. Third, we find that CEOs with more pronounced career concerns increase forecast frequency only when derivatives make earnings easier to forecast and find no evidence that investor demand drives the decision to provide a forecast. These results suggest that the primary mechanism for the association between derivative usage and forecast frequency is a reduction in the manager's costs of providing the forecasts. Finally, we find that the majority of derivative‐induced forecasts are uninformative to capital market participants, especially after FAS 161 provided the necessary underlying data to understand how firms use derivatives. Overall, we provide the first empirical evidence that firms that use derivatives issue more management forecasts, but we also find that these incremental forecasts are largely uninformative and appear driven by managerial career concerns.

TRANSAKSI KEUANGAN DERIVATIF LINDUNG NILAI (HEDGING) PADA PT. ASTRA INTERNATIONAL TBK

Based on research conducted by the Journal of Management and Business, hedging is an action to protect companies from the risk of loss of foreign exchange rates that occur due to business transactions, so that companies can conduct business transactions with a number of foreign currenciesto avoid the risk of foreign exchange losses that occur due to business transactions carried out by companies using derivative instruments (Adrian Sutedi in Desmiza, 2015). With derivative instruments, companies can minimize the possibility of bankruptcy, making it easier for a company to be able to get loans with lower interest rates (because the risk obtained by lenders is lower) (Zahra &; Tjahjono, 2020). As for the purpose of doing this research is to find out how the use of hedging applied by PT. Astra International Tbk uses financial derivative instruments from the 2022 annual financial reports. The method used by researchers in this study is a qualitative method with a content analysis approach.The results of this study researchers found that PT. Astra International Tbk uses several hedging derivative financial transactions, such as cross currency swaps, interest rate swaps, commodity contracts and foreign exchange futures contracts. Of the four types of hedging derivative instruments, PT. Astra International Tbk classifies these instruments into cash flow hedges that comply with the hedge accounting objective criteria and cash flow hedge categories that do not comply with the hedge accounting objective criteria.

Are Manager Policies Associated with Earnings Management Activity?

This study examines the effect of derivative ownership, leverage and tax avoidance on earnings management. This study uses samples from manufacturing sector companies listed on Indonesia Stock Exchange from 2018 to 2021. This research sample consisted of 72 observations based on the purposive sampling technique. Hypothesis testing was carried out using multiple linear regression analysis for panel data. The test results show that derivative ownership has a negative effect on earnings management, while corporate leverage has a positive effect on earnings management. Investors must be concerned about the companies with derivative instruments and corporate leverage because the management of these companies can perform earnings management. In addition, investors and creditors should consider the factors affecting the quality of earnings used to identify and evaluate investment opportunities

How Do Women on Board Reduce a Firm’s Risks to Ensure Sustainable Performance during a Crisis?

The research applies the Upper Echelons Theory and the Lehman Sisters Hypothesis to explain how women board members use investment, financial, and liquidity techniques to reduce risk and increase a firm’s value. An original dataset of listed US companies is analyzed to show how women strategists contribute to value creation and mitigate stock volatility and bankruptcy. A simultaneous equations approach captures the interplay between a company’s use of debt and financial derivatives. According to this research, organizations that employ derivative instruments benefit more from having women in advisory roles because women encourage proactive risk management and develop effective risk control measures. The research implies that businesses should actively promote gender equality on their boards rather than merely recognizing the need for diversity.

Delay Ait-Sahalia-type interest rate model with jumps and its strong approximation

Abstract In this paper, we study the analytical properties of the true solution to the generalised delay Ait-Sahalia-type interest rate model with Poisson-driven jumps. Since this model does not have a closed-form solution, we employ several new truncated Euler-Maruyama (EM) techniques to investigate the finite-time strong convergence theory of the numerical solution under the local Lipschitz condition plus the Khasminskii-type condition. We justify the strong convergence result for Monte Carlo calibration and valuation of some debt and derivative instruments.

Hedging Decision and Value of Public Companies Indexed at LQ45 Indonesia Stock Exchange

This study was conducted to reveal empirical facts on the impact of hedging decisions using derivative instruments on firm value and financial performance by using a sample of public companies listed on the LQ45 Index of the Indonesia Stock Exchange. The results of hypothesis testing reveal that hedging by using derivative instruments has a significant negative effect on firm value. This finding partially supports the conclusion of research conducted by Lenee and Oki (2017). However, this contradicts the findings of Alan and Gupta (2018) and Lenee and Oki (2017), who conclude that the use of hedging can minimize the volatility of foreign transactions and has a positive effect on increasing firm value. In line with the results of a research review conducted by Geyer-Klingeberg et al. (2021), there are contradictory results due to various factors that make the research findings inconsistent. Bachillera. et al. (2020) describe controversial results due to country specificity and different hedging types.

Yield Curve Models with Regime Changes: An Analysis for the Brazilian Interest Rate Market

This study examines the effectiveness of various specifications of the dynamic Nelson–Siegel term structure model in analyzing the term structure of Brazilian interbank deposits. A key contribution of our research is the incorporation of regime changes and other time-varying parameters in the model, both when relying solely on observed yields and when incorporating macroeconomic variables. By allowing parameters in the latent factors to adapt to changes in persistence patterns and the overall shape of the yield curve, these mechanisms enhance the model’s flexibility. To evaluate the performance of the models, we conducted assessments based on their in-sample fit and out-of-sample forecast accuracy. Our estimation approach involved Bayesian procedures utilizing Markov Chain Monte Carlo techniques. The results highlight that models incorporating macro factors and greater flexibility demonstrated superior in-sample fit compared to other models. However, when it came to out-of-sample forecasts, the performance of the models was influenced by the forecast horizon and maturity. Models incorporating regime switching exhibited better performance overall. Notably, for long maturities with a one-month ahead forecast horizon, the model incorporating regime changes in both the latent and macro factors emerged as the top performer. On the other hand, for a twelve-month horizon, the model incorporating regime switching solely in the macro factors demonstrated superior performance across most maturities. These findings have significant implications for the development of trading and hedging strategies in interest rate derivative instruments, particularly in emerging markets that are more prone to regime changes and structural breaks.

PENGARUH INSTRUMEN DERIVATIF MINYAK MENTAH, INDEKS DOLAR AS, INDEKS SAHAM UNGGULAN, SUKU BUNGA FED DAN INFLASI AS TERHADAP HARGA FUTURES EMAS: ANALISIS PERIODE 2012-2021

Gold futures have gained significant attention from investors in recent years, as demonstrated by the increasing trading volumes on the Jakarta Futures Exchange. Gold futures as a popular derivative instrument offers attractive returns and the potential to optimize portfolio allocation, making it one of the most preferred asset classes for investors. This study aims to analyze the influence of key factors such as the US dollar index, S&P 500 stock index, US inflation, FED funds rate, and crude oil futures on gold futures prices. The aim of the study is to provide investors, financial practitioners, and academics with a better understanding of the factors that can influence gold futures prices. This study utilized Error Correction Model as the research method, which effectively addresses the challenges associated with non-stationary time series data and enables the identification of short-term and long-term relationships among variables. The results show that the US dollar index has an inverse relationship with gold futures prices, influencing both the short and long-term. In the long run, an increase in the S&P 500 stock index and US inflation is anticipated to drive up gold futures prices. However, the impact of FED fund rates on gold futures prices is insignificant, primarily due to their low volatility. In addition, crude oil futures, as an alternative asset, have an adverse impact on gold futures prices over the long term.

Implementing Contract-for-Difference Arrangements for Hedging Electricity Price Risks of Renewable Generators on a Blockchain Marketplace

The dynamic nature of competitive electricity markets means that participants often resort to some form of derivative financial instrument. One such instrument is a contract-for-difference (CFD), usually available to renewable generators in certain electricity markets to enable them to hedge their price risk. Embracing CFD presents new risks such as counterparty credit, margining, third-party, legal, and process risks. Derivative instruments existing on blockchains have recently demonstrated potential as suitable hedging tools for minimizing the risks of renewable generators. This article applies this concept for the first time to hedge the price risk of renewable generators by implementing a novel decentralized finance instrument, an Ethereum blockchain marketplace governed by a smart contract to mediate between stakeholders mutually enrolled in bilateral CFD arrangements. The employed structure mitigates the underlying risks of traditional arrangements, underpinned by a suite of autonomous mechanisms.

A Systematic Review of Empirical Literature with Reference to Financial Derivatives

The introduction of financial derivatives in capital markets took off so as to control the volatility, thereby, providing a more controlled environment to the investors which can result more investment in capital markets. Thus, financial derivatives, most notably forwards, futures and options came into spot-light in the post-1970s period by reason of growing instability in the financial markets which was the reflection of high volatility in exchange rates and interest rates. Through the use of derivatives, it has been possible to partially or fully transfer the risk by locking-in the asset prices. During the mid-eighties, financial derivatives became the most active derivative instruments, generating volumes many more than the commodity futures. Since their emergence, these products have become so popular that by 1990s, they accounted for two-thirds of the total transactions in derivatives products. In the recent years, the market for financial derivatives has grown tremendously in terms of the variety of instruments available, their complexity and also turnover. In the class of equity derivatives, the world over, futures and options on stock indices have gained significant popularity than on individual stocks, especially among institutional investors, who are major players of index-linked derivatives, even small investors find these useful due to high correlation of the popular indices with various portfolio.

Strategy recommender for stock options in india using deep learning and live stock data from NSE

An Option is a financial instrument, which is extensively used in share markets, money markets, and commodity markets to hedge the investment risks. It acts as financial leverage investment and is a kind of derivative instrument along with forwards, futures and swaps, which are used for managing risk of the investors. Though derivatives are theoretically risk management and leveraged investment tools, it is mostly used as speculative tools. The objectives of this work is to build a positional stock trading strategy in derivatives (Options) and recommending the users the strategy based on the predicted price of the stock, and, to generate P&L charts and Payoff graphs based on different Options strategies selected by the user. For this, the stock market data is collected from various online sources such as NSE, and BSE websites. The contributions of this work include, a comparison of various strategies and to predict the range of the stock based on Implied Volatility (IV); providing the user with the Option Chain and enable to calculate several Options indicators like PCR, Max Pain; and, the implementation of machine learning algorithm (LSTM) to predict the sentiment of the stock. An interactive web application for users is created, which provides consolidated data in the form of a dashboard from where the users can analyse the stocks and make strategic decisions on procuring stocks.

Early evidence of the effect of ASU 2017‐12 on derivative disclosure compliance

AbstractThe growth in the use of financial derivatives for a variety of purposes has caused increased complexity in derivative reporting standards. As such, financial statement users have asked the Financial Accounting Standards Board to update guidance to increase transparency while preparers seek clearer guidance on the application of standards and a broadened scope of hedge accounting. The most recent derivative accounting guidance update, ASU 2017‐12 (Topic 815), broadens instruments that qualify for hedge accounting, expands allowable hedge accounting techniques, and reduces reporting requirements by omitting the reporting of hedge ineffectiveness. While these changes might simplify reporting requirements, there is the risk that the omitted disclosure would have been relevant to investors’ decision‐making. In this paper, we examine how derivative disclosure practices changed following the implementation of ASU 2017‐12. Using a hand‐collected sample of twenty S&P 500 firms, we calculate a derivative disclosure compliance (DDC) score and find that, on average, DDC scores decreased following firm adoption of ASU 2017‐12. This decline was realized for firms regardless of the notional amounts of derivative instruments held. However, the decline was not significant for early adopting firms suggesting a motivation for completeness by select firms. Our initial findings indicate that the update on derivative disclosures is not being uniformly applied potentially lessening its value to users. As a result, further updates may be necessary.

Does IFRS 7 Disclosure Weaken Earnings Management? Evidence from Indonesian Conventional Commercial Banks

This study examines the influence of derivative instruments, income diversification, and liquidity ratios on earnings management with IFRS 7 disclosure as a moderating variable. The sample used consists of 129 conventional commercial banks that are listed and 116 banks that are not listed on the Indonesia Stock Exchange (IDX). This study uses moderating regression analysis (MRA) with the Robustness Least Squares with S-Estimation method. This study also conducted a sensitivity analysis with previous earnings management measurements (Kanagaretnam et al., 2010) and an additional test by comparing listed and non-listed banks on the Indonesia Stock Exchange. The empirical results indicate that IFRS 7 disclosure weakens derivative instruments' negative effect and income diversification's positive effect on earnings management but does not provide a moderating effect on liquidity ratios. This study contributes to the bank management and Indonesian banks authority to provides another view of implementing IFRS 7 disclosure that have not been maximized in the Indonesian banking industry. In the future, the researchers expect the authorities to encourage all banks to disclose complete IFRS 7 disclosure to minimize information asymmetry. On the other hand, this study also contributes to the banking management to increase derivative instruments and to carry out more supervision on the provision of income diversification to minimize earnings management. Theoretically, this study contributes to the new earnings managemen t measurement by applying more prudential principles based on the IFRS framework, IFRS 9 and Basel III regulations.

Efficacy of financial derivatives instruments in Indian Capital Market: A critical observation

Efficacy of financial derivatives instruments in Indian Capital Market: A critical observation

Calculation of Local Times of Brownian Motion in Pricing of Derivative Instruments

Calculation of Local Times of Brownian Motion in Pricing of Derivative Instruments