Hedging Level Research Articles

The demand for hedging of oil producers: A tale of risk and regret

Rationalizing the relatively low levels of hedging observed in the oil market, compared to those predicted by pure risk minimization, has proven difficult. This article examines whether the objectives of oil producers can explain this discrepancy. From a theoretical perspective, it appears that the observed level of hedging is well explained by risk averse producers who also exhibit regret aversion towards potential losses in the derivatives market. When applying our models to the data, we find that regret effectively rationalizes producers' under-hedging and its persistence. Our results suggest that neither ambiguity surrounding basis risk, nor prospect theory can account for this behavior. Lastly, our findings indicate that relaxing the assumption of market completeness and considering quantity risk also fail to match the observed hedging activity of oil producers.

Shedding light on foreign currency cash flow hedges: transparency and the hedging decision

Utilizing firms in the S&P 500, we study whether greater transparency in the reporting of other comprehensive income (OCI) items, as mandated by ASU 2011-05, resulted in a reduction in information asymmetry, a change in the value relevance of this information, or a change in hedging practice. Our results show that while transparent reporting reduced information asymmetry, firms that engage in cash flow hedging do have greater information asymmetry than their counterparts that do not hedge. We find evidence that investors penalize firm value for greater volatility of OCI relative to net income volatility when reported transparently. When permitted, managers were able to mitigate the negative impact by reporting OCI only in the Statement of Shareholders’ Equity. We conclude that managers’ concerns regarding potential confusion surrounding OCI volatility following more prominent reporting led to changes in hedging behavior. After transparent reporting, we find a reduced likelihood of foreign currency cash flow (FXCF) hedges and a reduced level of FXCF hedging among firms experiencing the greatest volatility of unrealized hedging gains and losses.

The Potential of Residential Property in Poland as an Inflation Hedge Investment

Abstract The research objective of the article was to assess the potential of residential property in Poland as an inflation hedge investment. The study was conducted using innovative measures of the level of inflation hedging. The study was made for Poland’s six largest local residential markets, for two types of investments, for different investment horizons (from 6 to 15 years). The research period adopted was: 3Q2006-4Q2022. In all cities, investments providing only capital gains allowed an attractive inflation hedging level to be achieved. Investments that additionally included rental offered a high inflation hedging level. The variation in the six cities studied in terms of inflation hedging through housing investment was found to be very low. The question of how extending the investment horizon affected the inflation hedging ability was not firmly answered. Frequently, the extension of the investment horizon has been accompanied by an increase in the level of hedging.

Has increased prominence of translation results changed net investment hedging practice?

PurposeThe purpose of this paper is to examine the impact of greater reporting prominence of translation results following Accounting Standard Update (ASU) 2011-05 on net investment (NI) hedging practice. The authors investigate the role of increased transparency on the decision to engage in NI hedging (participation), the degree of NI hedging (level) and the hedging vehicle choice.Design/methodology/approachThis paper uses the Heckman two-stage procedure (Heckman, 1979) in the hedging choice analysis. In the first stage, the authors model the participation decision as a function of reporting transparency, translation results and other control variables. In the second stage, the authors include the Inverse Mills ratio from the first stage Probit to examine both the level and vehicle choice decisions.FindingsWhen translation is reported more prominently, the authors find an increase in the level of NI hedging and a greater likelihood of debt as the hedging vehicle, but no evidence firms are more likely to hedge. Regardless of where translation results are reported, firms facing ongoing translation losses are more likely to hedge.Research limitations/implicationsThis paper examines S&P 500 firms in the years surrounding the effective date of ASU 2011-05. The findings suggest managers respond to the increase in reporting transparency by increasing hedging for long-term risk management purposes, supporting accounting authorities’ efforts to promote other comprehensive income information transparency. The results should hold for comparable firms with similar currency exposure, size and visibility, but may not apply to smaller firms with limited translation exposure. As only about a quarter of firms with translation exposure engage in NI hedging, the primary results are based on a relatively limited number of firms.Originality/valueTo the best of the authors’ knowledge, this is the first study that examines NI hedging behavior changes following ASU-2011-05. Second, the authors are the first to explore why firms are almost equally split between derivatives and debt as their exclusive hedging vehicle.

Multi objective simulation-optimization operation of dam reservoir in low water regions based on hedging principles.

The high level of reliability of water resources is always an advantage for consumers, but in arid and semi-arid regions where the inflow to the reservoir is faced with severe fluctuations, it makes sense to decrease the percentage of reliability of the system and allocate less water to consumption zones to prevent critical conditions such as emptying of the reservoir. In this research, the employed operation model is based on the simulation-optimization combination by considering the objectives of minimizing the violation of the allowed capacity of the reservoir and maximizing the percentage of supplying the demands. The optimal hedging variables are specified by linking the WEAP (Water Evaluation and Planning System) to the MOPSO multi-objective optimization algorithm. According to the available data, the duration of the simulation and optimization period in the model is 360months. After 1000 iterations, the optimal reservoir volume values are obtained at the hedging level and hedging coefficient in different months. Finally, the model results are compared with the results obtained from the standard operation policy (SOP). The results show that the proposed model is able to manage the allocation to needs in the dry months and prevent the reservoir from emptying. Also, by storing a part of the flow in the reservoir in watery months and consuming it in low water months, it increases the supply of needs by 20 to 35% and reduces the failure rate in dry months.

Production control in manufacturing systems with perishable products under periodic demand

Manufacturing systems are often exposed to variable market conditions, resulting in demand variations over time. Production control in this situation is more challenging than in conventional case characterized by constant demand rate. When manufactured products are perishable, accounting for demand variations is critical for correctly determine the safety stock level. An important source of periodic demand variability are seasonal changes in market conditions, although weekly or monthly changes also need to be taken into account. These variations are critical for production control in several branches of food and pharmaceutical industry, where products are also subject to deterioration over time (perishabilty). Both demand variability and product perishability must be taken into account for production policy optimization. It is particularly important when production facility is failure-prone. The rationale here is that the conventional approach is based on setting the safety (hedging) inventory level in order to cope with potential failures leading to shortage. For perishable products, however, this approach needs to be reconsidered due to eventual deterioration of products kept in stock longer than the product shelf-life.To address the production planning problem in the context of perishable products, we have developed a 3-steps procedure, that consists of (a) determining the critical (hedging) inventory level that varies in time, adapting to demand variations, (b) determining the upper limit for the products kept in stock (perishable inventory limit), which depends on the shelf-life and demand variation pattern, thus also varies in time, and (c) showing that the perishable inventory limit constitutes an upper bound for the hedging level. The proposed production policy adapts to periodic demand variations and account for a limited product shelf-live; it is optimal and results in no perished products. By preventing over-production during the low demand rate periods, this policy allows to integrate incurred cost minimization with environmental requirements by ensuring no waste manufacturing.

Firming merchant renewable generators in Australia’s National Electricity Market

Global decarbonisation is driving investments in intermittent renewable generation, with most plant entering the market by way of a Power Purchase Agreement. In Australia’s National Electricity Market, a surprising number of renewable generators have entered on a merchant basis. To maintain tractable revenues some minimum level of hedging is required, but in an energy-only electricity market with a very high market price cap, merchant intermittent generators require some level of associated firming capacity to ensure spot price exposures can be adequately managed. This article uses unit commitment, battery arbitrage and stochastic discounted cashflow valuation models to compare an Open Cycle Gas Turbine and a battery as firming options for a hypothetical wind farm in the South Australian region of the NEM. Using historic market data from 2010–2020, we find OCGT firming capacity helps the wind farm to generate consistent net cash flows, allowing it to withstand the highs and lows of spot market prices whilst covering required contract-for-difference payments associated with hedging. When battery firming is deployed, the wind farm/ battery portfolio generated higher cash flows at specific times, reflecting participation in price arbitrage under low spot price scenarios. However, battery performance was constrained by costly storage capacity.

Production policy optimization in the systems with perishable products under seasonal demand

Manufacturing systems are often subject to dynamic market conditions, characterized by demand variations over time. Production policy optimization in this situation is more challenging than in case of stationary demand rate. When manufactured products are perishable, the demand variations are of particular importance, as they often result in additional losses due to disposal of perished products. In particular, that is the case in food and pharmaceutical industry. Both these aspect must be taken into account for production policy optimization. It is particularly important when the production facility is failure-prone. The rationale here is that conventional approach is based on setting the safety (hedging) inventory level in order to cope with potential equipment failures leading to shortage. For perishable products, however, this approach needs revision due to eventual deterioration of products kept in stock longer than the shelf-life limit. To address the production control problem in this context, a 3-steps procedure is developed. First, the hedging inventory level that varies in time adapting to demand variations is computed. Second, the upper limit for the products kept in stock (perishable inventory limit), which depends on the shelf-life and demand variation pattern (thus also varies in time) is determined. Third, that perishable inventory limit is shown to determine an upper bound for the hedging level. The proposed production policy adapts to demand variations and accounts product shelf-live; it is optimal and results in no perished products.

Optimal operation of water resources systems using MOICA algorithm with reservoir hedging approach in low‐water regions*

AbstractIn this study, simulation and optimization models are combined to apply the reservoir hedging policy. The simulation of the study basin is done by the Water Planning and Evaluation System (WEAP) model to operate the Doiraj dam reservoir located on Doiraj River. In addition, to optimize the system, the multi‐objective imperialist competitive algorithm (MOICA) model is employed so that the first goal is to maximize the percentage of supplying demands, while the second one is to reduce the violation of allowable capacities of the reservoir during the operation period. In this regard, modelling the operation of the reservoir is conducted based on the current condition for 720 months (i.e., from October 1960 to September 2019). Finally, by introducing the optimization scenario and applying the reservoir hedging policy, the optimization of the operation of the reservoir is done, and the outcomes are compared with the outputs of the reference scenario. In this study, by considering 24 decision variables including 12 hedging level variables and 12 hedging coefficient variables, the optimal answers are yielded after 1,000 iterations. The findings show that the violation of the allowable capacities did not occur in any period in the optimization scenario, while in the reference scenario, the reservoir level reached the dead level in sequent months with more water shortage, which might result in a lack of water supply in such months and serious damages to the system. Due to the application of the hedging principles in the optimization mode, the percentage of supplying the demands in the dry months has extended between 20% and 35% compared to the reference state, which demonstrates a significant reduction in the failure rate in such months compared to the reference mode.

The Low Co-occurrence of Nominalization and Hedging in Scientific Papers Written by Chinese EFL Learners

This article hypothesizes that one of the reasons for Chinese EFL learners’ rigid use of nominalization and insufficient use of hedging in academic writing can be attributed to the unclear understanding of the relationship between these two expressions. The aim of the research is to first prove and then explain the possible co-occurrence of nominalization and hedging in scientific papers, with the intention of deepening Chinese EFL learners’ understanding of the reasons for their possible co-occurrence. After a corpus-assisted statistical analysis of sixty abstracts selected from leading scientific journals written by native English speakers, it’s been found that there is indeed a tendency for nominalization and hedge to co-occur both at the textual-level and clause-level. Besides, a tentative analysis is conducted to explain the pattern of their co-occurrence. It has been observed that the number of nominalized expressions in clauses is inversely correlated with the probability degree of hedging, and the position of nominalization in the clause (theme or rheme) influences the generalization level of hedging. The research results could shed light on the pedagogic approach in improving Chinese EFL learners’ academic writing by making evident that the elusive Grammatical Metaphor competence could be enhanced by deepening the understanding of the inter-relationship between seemingly different in-congruent expressions like nominalization and hedges.

Family Business and Transaction Exposure

This study provides additional evidence and insight into theories on transaction exposure as it empirically examines the magnitude of transaction exposure in Kuwait, a developing country. Specifically, it investigates factors that might influence Kuwaiti firms’ responses to their transaction exposure and how being a family business or part of a family business group could play a mediating role in this response. Through conducting a questionnaire survey with the largest 147 industrial and commercial Kuwait firms, the results of a multinomial logistic regression indicate that theories on financial hedging seem to be inapplicable in the Kuwaiti case. However, these theories provide only partial explanations for management behavior in response to the transaction exposure of Kuwaiti companies. Findings show that a firm being part of a family business group is significantly correlated with its level of hedging, suggesting that firms that are members of a family group of businesses are expected to hedge at a higher level. This points to other theories, such as institutional theory, as playing greater roles in explaining the transaction exposure behaviors of firms in developing countries, and also suggests that family-controlled businesses are expected to engage in more innovative financial strategies and hedge at a higher level. The research findings imply that Kuwaiti firms need to be more aware of their transaction exposure and pay more attention to the related issues. Training programs in risk-management strategies should be provided to decision makers to help them evaluate the hedging strategies they employ. This study shows how different behaviors toward risk exist between firms that operate in developed and developing countries, including the effect of being part of a family business resulting in firms engaging in more innovative financial strategies when dealing with risk.

Optimal production and corrective maintenance in a failure-prone manufacturing system under variable demand

Failure-prone manufacturing systems facing dynamical market conditions that result in demand variations are considered. The combined production and corrective maintenance optimization problem for a one-machine-one-product system is addressed. Repairing the machine after the failure, the manager has to solve the dilemma: to choose an inexpensive (but lower) repair rate, or to use the higher, (but more expensive) repair rate. The former decision seems to be appropriate when there is no risk of inventory shortage, while the latter one has to be used in critical (stock shortage) situations. Precise solution to this problem presented in the paper is theoretically instructive and valuable for practitioners. Optimality conditions in the form of time-dependent Hamilton–Jacoby–Bellman equations are obtained and a novel numerical approach is proposed for solving these equations for the case of periodically time-varying demand. The optimal policy is shown to be the hedging-curve-policy, that extends the hedging-point-policy to the case of varying level of safety stock. The simulation results show that the optimal policies have an important property of anticipating the future demand evolutions and making the optimal decisions relevant to such dynamic conditions. In particular, it has been shown that in the large domain of the system parameters it is advantageous to use the lower (and inexpensive) repair rate when the stock is approaching the hedging level and especially when the demand level is near its bottom edge.

Production Control with Price, Cost, and Demand Uncertainty

An optimal production flow control problem of a make-to-stock manufacturing firm with price, cost, and demand uncertainty is studied. The objective of the flow rate control problem is maximizing the average profit that is the difference between the expected revenue and the expected production, inventory holding, and backlog costs. The uncertainties in the system are captured jointly in discrete environment states. In each environment state, the price, cost, and demand take different levels. The transitions between different environment states evolve according to a time-homogenous Markov chain. By using a continuous flow model, the optimal production policy is stated as a state-dependent hedging policy. The performance of the system where the production cost alternates between a high and a low cost level and the demand is either constant or also alternates between a high and a low level is analyzed under the double-hedging policy. According to this policy, the producer produces only when the cost is low and the surplus is between the two hedging levels. However when the backlog is below the lower hedging level, the producer produces with the maximum capacity regardless of the cost. The effects of production cost, production capacity, demand variability, and the dependence of the demand and the cost on the performance of the system are analyzed analytically and numerically. It is shown that controlling the production rate optimally allows producers respond to the fluctuations in price, cost, and demand in an effective way and maximize their profits.

Strategies for Developing English Academic Writing Skills

Non-native English-speaking students at, or about to enter British Universities and other Western universities where the language of instruction is English may experience challenges with academic writing, often one of the most important means of assessing students. Pre-sessional and in-sessional English academic writingcourses have been developed to aid students, and traditionally covered a range of topics. This paper discusses essential ‘pre-writing’ tasks. It then outlines some of the essential elements of academic writing; these often focus on paragraph structure, basic components of an essay, and different functional types of essays. Other features covered by this paper include aspects of language such as level of formality, cohesive devices, caution and hedging, supplying evidence, and avoiding plagiarism, amongst others. This paper also emphasizes the growing importance of collaborative learning, critical thinking and autonomous leaning which may be insufficiently familiar to students from non-Western learning environments where traditionally factual recall is given the greatest importance. Inductive and deductive approaches to paragraph organization, and also essay development have also been introduced. These approaches may also contrast with the rhetorical features familiar to non-native students from various cultures around the world and require special attention. Contemporary pre-sessional courses are also becoming more specialized, targeting English suitable for specific sets of disciplines at the undergraduate at postgraduate level. For example, courses focusing in STEM subjects (science technology, engineering and mathematics) are replacing more ‘generic’ academic English courses.

Strategies for Developing English Academic Writing Skills

Non-native English-speaking students at, or about to enter British Universities and other Western universities where the language of instruction is English may experience challenges with academic writing, often one of the most important means of assessing students. Pre-sessional and in-sessional English academic writingcourses have been developed to aid students, and traditionally covered a range of topics. This paper discusses essential ‘pre-writing’ tasks. It then outlines some of the essential elements of academic writing; these often focus on paragraph structure, basic components of an essay, and different functional types of essays. Other features covered by this paper include aspects of language such as level of formality, cohesive devices, caution and hedging, supplying evidence, and avoiding plagiarism, amongst others. This paper also emphasizes the growing importance of collaborative learning, critical thinking and autonomous leaning which may be insufficiently familiar to students from non-Western learning environments where traditionally factual recall is given the greatest importance. Inductive and deductive approaches to paragraph organization, and also essay development have also been introduced. These approaches may also contrast with the rhetorical features familiar to non-native students from various cultures around the world and require special attention. Contemporary pre-sessional courses are also becoming more specialized, targeting English suitable for specific sets of disciplines at the undergraduate at postgraduate level. For example, courses focusing in STEM subjects (science technology, engineering and mathematics) are replacing more ‘generic’ academic English courses.

Leveraging articial neural networks for hedging foreign investments in emerging markets: a large-scale empirical study

Our work provides a generalisable assessment of prediction performances of ANN models for predicting currencies of emerging markets. We perform a large-scale empirical study on four emerging markets (i.e. India, China, Brazil and Mexico) and two developed markets (i.e. Australia and Singapore) by leveraging three ANN training algorithms to predict their exchange rates against US Dollar, Euro, British Pound and Japanese Yen. We find that our models successfully predict the emerging and developed market currencies for both next week and the next quarter except in the face of a currency crisis. We also find that the Levenberg-Marquardt model outperforms the other two models in predicting exchange rates. Managers of multinational firms can leverage our findings to determine whether or not to hedge their exchange rate exposure for the next quarter and the level of hedging. Moreover, practitioners trading currency futures can leverage our models to determine when to exit their positions.

Corruption as an Agency Problem – Currency Hedging in Corrupt Countries

Risk management should not be the primary concern of a firm operating in an efficient stock market (Modigliani and Miller, 1958). Shareholders can manage their individual risk by holding well-diversified portfolios (Fama, 1980). But managers sometimes operate on the basis that their future earning opportunities will be affected by the continued existence and not necessarily profitability of the firms which they manage, thereby exhibiting agency problems (Coase, 1937; Fama, 1980). In this paper, it is argued that managers operating in corrupt countries will exhibit greater agency problems by acting contrary to shareholders interest and by seeking less risk at the expense of lower returns (Habib and Zurawicki, 2001). We seek to establish the extent of the agency problem based on the level of currency hedging in which managers engage and we argue that in corrupt countries, all other things equal, more hedging will take place, acting counter to (Modigliani and Miller, 1958), as managers act to preserve their personal wealth, in the form of annual salaries, which is closely tied to firm longevity, rather than firm profitability.

Newspaper coverage of water issues in Australia

The media has been found to have an impact on public debate, public opinion, and public policy agendas. Public debate, and public opinion about water conservation and water supply management projects matter because they can influence specific outcomes. For example, public opinion can potentially lead to positive behaviour, like increased water conservation, or potentially negative behaviours such as public opposition to developments such as dams or water recycling plants, which may be necessary under changing climatic conditions. It is therefore critical to understand how the media reports on water-related topics. Results from a content analysis of 1253 newspaper articles published in Australia in 2008 indicate that water-related reports are characterised by lack of inclusion of views held by various stakeholders, a low level of support of statements with scientific evidence, a low level of impartiality in the sense of reporting on opposing views and a relatively high level of hedging, meaning that the author signals that there is some uncertainly about the reported information. In sum these tendencies could theoretically culminate to work against public engagement in water issues and undermine the public's understanding of and confidence in water management measures. Proactive measures of media management are recommended.

How Do Financial Firms Manage Risk? Unraveling the Interaction of Financial and Operational Hedging

This paper investigates how firms manage risk by examining the relationship between financial and operational hedging using a sample of bank holding companies. Risk management theory holds that capital market imperfections make cash flow volatility costly. I investigate whether financial firms consider this cost or focus exclusively on managing tradable exposures. After documenting that acquisitions provide operational hedging by reducing potentially costly volatility, I find that postacquisition financial hedging declines even after controlling for the specific underlying risks. In addition, the decrease in financial hedging is related to the acquisition's level of operational hedging. Larger increases in operational hedging are followed by larger declines in financial hedging. These results indicate that firms in this sample manage aggregate risk, not just tradable exposures, and that operational hedging can substitute for financial hedging. This paper was accepted by John Birge, focused issue editor.

Management Insights

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