Risk Hedging Research Articles

Aligning the risk hedging strategy with supplier collaboration and manufacturing competitiveness: a resource-based and contingency approach

PurposeThe purpose of this study is to examine the alignment between the risk hedging strategy and supplier collaboration and its effect on manufacturing competitiveness.Design/methodology/approachBuilding on the resource-based view (RBV) and contingency theory (CT), this study is guided by a positivist philosophy and employs a survey strategy to investigate both the direct relationship between the risk hedging strategy and manufacturing competitiveness and the moderating role of supplier collaboration using data collected from 397 respondents of manufacturing firms. Partial least squares structural equation modeling (PLS-SEM) technique is used to analyze collected data and to present the research findings.FindingsConsistent with the RBV and CT, study findings indicate that a significant positive relationship exists between the risk hedging strategy and manufacturing competitiveness and that this relationship becomes stronger when supplier collaboration is interactively aligned. Study findings provide important insights on the role of the risk hedging strategy in promoting manufacturing competitiveness. Furthermore, supplier collaboration as a moderator accounts for a significant proportion of the relationship between the risk hedging strategy and manufacturing competitiveness.Research limitations/implicationsInternal resources provide an explanation of the competitive differences among firms employing the risk hedging strategy. However, the environment presents opportunities for firms to acquire additional resources to fulfil the unique collaborative requirements of the risk hedging strategy. This study has used the moderation perspective to explain the interaction between the risk hedging strategy and supplier collaboration and its effect on manufacturing competitiveness. Future studies could incorporate other alignment concepts such as mediation and systems approach and compare the results to improve the theory.Originality/valueThis study can be considered as its kind in the supply chain management literature and both practitioners and researchers can benefit from the experience of resource-based and contingency analysis research and the results of aligning the risk hedging strategy with supplier collaboration for higher levels of manufacturing competitiveness.

COVID-19′s impact on the spillover effect across the Chinese and U.S. stock markets

This paper investigates the cross-market spillover effect between the Chinese and U.S. stock index returns, and the markets’ volatility from the impact of COVID-19′s spread in China. The results reveal that there was an asymmetric transmission of return shocks to a stronger degree from the Chinese stock market to the U.S. market rather than from the opposite direction, and this asymmetric spillover effect during the COVID-19 spread period in China was three to five times stronger than during the pre-COVID-19 period and the period when COVID-19 was contained in China. Furthermore, we find the risk correlation between the two markets are highest during the COVID-19 spread period in China, and RMB/US exchange rate and gold are two macro spillover channels. The study has important implications for regulators’ supervision of financial markets during a global crisis, and for investors’ cross-market hedging of spillover risks from a systematic shock.

Going downstream – An economical option for oil and gas exporting countries?

This paper surveys normative and positive arguments on why oil and gas exporting countries, in particular OPEC members, may expand into downstream industries (e.g. refining, petrochemicals), instead of exporting raw materials. Indeed, local refining can serve as a partial hedge against the vagaries of the oil price. Furthermore, as downstream activities require more complex tasks, the potential to provide economy wide spillovers, thereby fostering overall economic development will be generated. Major explanations including price differentiation (e.g., export taxes), industrial organization (e.g., property rights), efficiency (e.g., vertical integration), local development and spillover effects (e.g., on comparative advantage), risk hedging, climate change, and finally, political economy (e.g., lobbying and empire building) are surveyed from normative and positive aspects, which are then tested against facts. We also highlight the fact that all of those justifications are only efficient if political considerations are put aside. Policies such as granting the national oil companies a monopoly and by very large subsidies on refined products may indeed hinder achieving some of those goals.

Main methodological principles of transfer pricing rules for financial transactions of the enterprises

The article examines the theoretical aspects of transfer pricing in Ukraine. Threats of offshoring the banking system of Ukraine to create conditions for the abuse of transfer pricing in order to optimize taxation are considered. The rules of transfer pricing for financial transactions were studied and systematized based on the study of the recommendations of the Organization for Economic Cooperation and Development. Goal. The purpose of the study is to systematize the rules of transfer pricing for financial transactions in Ukraine to minimize the conditions for the erosion of the tax base of the participants of domestic financial and industrial groups. Methods. Research methods are general scientific methods of cognition, in particular, the article uses methods of empirical analysis to study the main concepts of research, comparison methods to compare legislative requirements regarding transfer pricing; graphic methods for building a structural and logical diagram of transfer pricing rules for financial transactions; methods of systematization and generalization for the systematization of transfer pricing rules for financial transactions. The results. The work outlines the shortcomings of the national legislation regarding the regulation of transfer pricing for financial transactions, identifies the risks of offshoring the banking system of Ukraine regarding the abuse of transfer pricing during financial transactions, systematizes the rules of transfer pricing for financial transactions, and characterizes the main methods of control over transfer pricing for financial transactions. The rules for the regulation of transfer pricing for financial transactions have been determined, which include: the exact delimitation of financial transactions, the assessment of treasury functions, cash pooling, financial guarantees, risk hedging and captive insurance. The mechanism for evaluating a financial transaction for its compliance with transfer pricing criteria is outlined. The rules and methods of assessing transfer pricing for financial transactions can be used to adapt domestic legislation to the global practice of transfer pricing regulation.

БІРЖОВІ ІНСТРУМЕНТИ МІНІМІЗАЦІЇ ЦІНОВИХ РИЗИКІВ РИНКУ АГРОПРОДУКЦІЇ

The exchange as an element of the wholesale trade infrastructure of the agrarian market was considered: essence, functions, characteristics. The role of the Ukrainian agricultural sector in the world market is described, the factors influencing price fluctuations for agricultural products, in particular grain, are determined. In connection with the factors affecting prices, the negative impact of insufficient development of the modern exchange infrastructure of Ukraine was also considered, such as: low level of actual activity of Ukrainian commodity exchanges, lack of economic prerequisites despite the dynamics of their number, failure of exchanges to fulfill their direct functions regarding the formation of an effective agricultural products market. Deficiencies in the statistical analysis of the commodity exchange market of Ukraine were also noted, and the need to create an appropriate system for monitoring commodity exchange activity indicators was emphasized. The perspective of the positive impact of infrastructural improvements on the activation of price risk hedging in the process of exchange trading, through the significant spread of derivative exchange contracts – derivatives of various types, is considered. The characteristics of derivatives as derivative financial instruments are presented, their key characteristics are given, which allow the parties to these contracts to protect their market positions and ensure the prospect of receiving planned financial benefits in the future. The features of the futures contract, as the most promising type of derivatives and the optimal risk hedging tool for Ukrainian participants in the agricultural market, have been studied. In particular, attention is focused on the types and specifics of the manifestation of price risks, as well as the mechanisms of protection against them or minimizing the impact of such risks. The modern problems of the underdevelopment of this exchange contract in Ukraine, the reasons for their occurrence and ways to overcome them are considered. According to the results of the presentation of the main material of the study, relevant conclusions and proposals are made, promising directions for further research in this field are given.

УПРАВЛІННЯ ФІНАНСОВИМИ РЕСУРСАМИ БАНКІВСЬКИХ УСТАНОВ І СТРАХОВИХ КОМПАНІЙ: ІНТЕГРАЦІЙНИЙ АСПЕКТ

The article defines the essence of banking institutions and insurance companies as leading financial intermediaries in Ukraine, whose legal status is determined by special laws of Ukraine. Emphasis is placed on the new Law of Ukraine "On Insurance" adopted last year, which takes into account changes in the legal regulation of the insurance market associated with the creation of a mega-regulator in the form of the National Bank of Ukraine. It is shown that the specified normative legal acts of Ukraine provide for the possibility of creating banking groups and insurance groups. It is proven that the integration of banks and insurance companies is due to the following factors: methods of interaction – transfer of banking risks to the insurance company and active sale of insurance products in bank branches; functions – capitalization and risk hedging; forms of integration – merger and acquisition; agreement on joint sale of financial products, use of each other's financial services; sales methods – creation of joint products of banks and insurers (bancassurance). The factors of disintegration of banks and insurers are identified: limited captive interests, insufficient financial culture, lack of common standards, imperfect legislation on cooperation and interaction between banks and insurers, insufficient motivation of bank employees when selling insurance products. The contents of the special adopted normative acts of the National Bank of Ukraine, which stimulate the integration of banks and insurers, are summarized, including: Regulations on the organization of the risk management system in banks of Ukraine and banking groups, Regulations on the procedure for regulating the activities of banking groups. Ways to develop bancassurance in Ukraine are proposed: termination of martial law, the arrival of branches of European banks and insurers in Ukraine, an increase in the volume of sales of insurance protection through the mediation of the bank, a decrease in the cost of credit resources; strengthening the financial condition and status of banks and insurance companies, increasing their capital; improving the transparency and openness of the financial market.

A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios

A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios

A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios

A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios

How Can Probabilistic Solar Power Forecasts Be Used to Lower Costs and Improve Reliability in Power Spot Markets? A Review and Application to Flexiramp Requirements

Net load uncertainty in electricity spot markets is rapidly growing. There are five general approaches by which system operators and market participants can use probabilistic forecasts of wind, solar, and load to help manage this uncertainty. These include operator situation awareness, resource risk hedging, reserves procurement, definition of contingencies, and explicit stochastic optimization. We review these approaches, and then provide a case study in which a method for using probabilistic solar forecasts to define needs for reserves is developed and evaluated. The case study has three parts. First, we describe building blocks for enhancing the Watt-Sun solar forecasting system to produce probabilistic irradiance and power forecasts. Second, relationships between Watt-Sun forecasts for multiple sites in California and the system’s need for flexible ramp capability (flexiramp) are defined by machine learning and statistical methods. Third, the performance of present methods to defining flexiramp requirements, which are not conditioned on weather and renewables forecasts, is compared with that of probabilistic solar forecast-based requirements, using a multi-timescale production costing model with an 1820-bus representation of the WECC power system. Significant potential savings in fuel and flexiramp procurement costs from using solar-informed reserve requirements are found.

Dynamic Connectedness of Major Digital Currencies: A Time‐Varying Approach

The continuous increase in the market capitalization of digital currencies has determined them to be an essential force driving global financial development. Research on digital currency connectedness has implications for the pricing of related financial products and the development of risk hedging strategies. This study aims to analyse the changing relationship among four prominent digital currencies over time. Our research period covers normal periods, outbreaks, and the post‐epidemic phase. A refined TVP‐VAR method was adopted to conduct this study, which ensures time‐varying analysis and avoids errors caused by the rolling‐window size and the calculation of the observation loss. It is found that the total connectedness of major digital currencies is in an upward trend in the majority of the time, which, however, dropped dramatically in 2020 as the epidemic spreads internationally. It is also found that ETH is a consistent spillover transmitter and that although BTC is often shown as a transmitter, its spillover initially declines considerably and then remains weak until recently. BNB and XRP are typically spillover recipients, with BNB’s spillover varying more greatly.

Online procurement problem with risk hedging

We study risk hedging in the online procurement problem, where one buyer and one seller sign reservation contracts in advance to hedge against the risks from the uncertainties of real demand and spot price. We generalize the traditional two-stage procurement model such that the buyer has the flexibility of signing multiple contracts in the first stage and makes decision on executions in the second stage. A lower bound on the performance of any deterministic algorithms is presented by restricting the possible execution price sequence and real demand in worst case. Then a deterministic online algorithm called Price Look Back (PLB) is designed with a competitive ratio that tends to the lower bound if historical execution prices are less fluctuant. Extensive experiments are conducted on both synthetic and real-life instances to evaluate the practical performance of PLB. The experimental results show that PLB performs significantly better than its (worst-case) theoretical guarantee in most instances. In addition, PLB is robust with respect to inaccurate information learned from the historical data. Specifically, the average extra cost incurred by the inaccurate information can be around 5% in real-life instances.

Equal risk pricing and hedging of financial derivatives with convex risk measures

In this paper, we consider the problem of equal risk pricing and hedging in which the fair price of an option is the price that exposes both sides of the contract to the same level of risk. Focusing for the first time on the context where risk is measured according to convex risk measures, we establish that the problem reduces to solving independently the writer and the buyer's hedging problems with zero initial capital. By further imposing that the risk measures decompose in a way that satisfies a Markovian property, we provide dynamic programming equations that can be used to solve the hedging problems for both European and American options. All of our results are general enough to accommodate situations where the risk is measured according to a worst-case risk measure, as is typically done in robust optimization. Our numerical study illustrates the advantages of equal risk pricing over schemes that only account for a single party, pricing based on quadratic hedging (i.e. ϵ-arbitrage pricing), or pricing based on a fixed equivalent martingale measure (i.e. Black–Scholes pricing). In particular, the numerical results confirm that when employing an equal risk price both the writer and the buyer end up being exposed to risks that are more similar and on average smaller than what they would experience with the other approaches.

Metadiscourse in English instruction manuals

Instruction manuals need to explain specialized technical information to readers of the general public. Using metadiscourse effectively, i.e. engaging with readers and guiding them through the text, is therefore crucial for successful communication. An increased awareness of how these features are used in instruction manuals would therefore help technical writers write reader-friendly texts. This study investigates metadiscourse in ten instruction manuals in English using Hyland’s (2005) taxonomy. It was found that the interactive metadiscourse is predominated by frame markers and code glosses, which reflects the purpose of instruction manuals to explain clearly and efficiently how a machine works. The interactional metadiscourse reflects the twofold relationship between the writers and their readers: on the one hand, that of instructor and inexperienced users of the product and, on the other, that of manufacturer and customer. The former is reflected by the frequent usage of necessity attitude markers and boosters to reinforce instructions and precautions. The latter is reflected by the usage of politeness markers and the hedging of problems and risks. The visual presentation of the manuals, i.e. its segmentation, typographical variation, punctuation and illustrations, was also shown to express metadiscourse meanings.

Evolution laws and new trends of global LNG pricing and their implications

Natural gas is of great significance to ensuring China's energy security and achieving “carbon neutrality” by 2060. However, the lack of power to decide LNG import pricing and the high resource cost bring challenges to the stable supply of natural gas in China. In this regard, after analyzing the historical evolution laws of global LNG pricing, this paper systematically summarizes the pricing trends of newly signed contracts in 2020, and comparatively analyzes China's long-term LNG import pricing modes and its problems. And the following research results were obtained. First, the global LNG pricing mechanism is more diversified, regional characteristics and “Asian premium” problems are obvious, and different pricing mechanisms complement each other. Second, the newly signed long-term LNG agreement is linked with oil prices to play a dominant role again, and the oil-linked slope declines continuously and presents a dynamic mixed S-curve. Third, China's long-term LNG agreement is linked with oil prices at a high proportion, so there are no market conditions of gas–gas competition and the price review period is long. Finally, several suggestions were proposed for China's LNG import pricing. Firstly, stick to the principles of “short-term flexibility” and “long-term stability”, and make use of multiple modes comprehensively, e.g. gas–gas competition and Brent price linked, instead of completely decoupling oil prices. Secondly, referring to global newly signed contracts and Asian reviewed contracts, adhere to the principle of market parity, improve the price review terms and shorten the review period. Thirdly, the government shall support the construction of natural gas trading centers and futures markets and form the internationally recognized regional benchmark price as soon as possible. Fourthly, make a plan in advance, establish a risk hedging mechanism and control the overall cost of imported LNG resources.

Research on Financial Hedging Decision Based on Exchange Rate Risk in Transnational Supply Chain

This paper considers a three-echelon manufacturer-retailer-supplier supply chain, the purpose of which is to investigate the influence of the bilateral exchange rate risks of import and export and the leading company’s financial hedging on the decision-makers of the supply chain. Firstly, it constructs the profit function and the financial hedging decision-making model of each member in the decentralized supply chain. Secondly, it introduces the incentive mechanism of exchange rate risk hedging in the centralized supply chain. Thirdly, from the perspective of wholesale price agreements and revenue-sharing contracts, it discusses the impact of financial hedging behavior and bilateral exchange rate risks on the decision-making process of each member through mathematical modeling. Finally, it explores the relationships of decision variables through simulation analysis. The results illustrate that (i) for decentralized and centralized decision-making, the manufacturer’s expected profit and profit variance decrease with the increase of the fluctuations of import and export exchange rates under the hedging strategy for exchange rate risks; (ii) compared with the decentralized supply chain, the manufacturer’s expected profit in the centralized supply chain decreases slightly under the revenue-sharing contract; (iii) in the centralized supply chain, if the manufacturer’s risk hedging ratio is high, its profit variance is smaller than that of the decentralized supply chain and the expected profits of the retailer and the supplier will increase significantly; and (iv) for the members of the transnational supply chain, centralized decision-making is better than decentralized decision-making.

Implied volatility estimation of bitcoin options and the stylized facts of option pricing

The recently developed Bitcoin futures and options contracts in cryptocurrency derivatives exchanges mark the beginning of a new era in Bitcoin price risk hedging. The need for these tools dates back to the market crash of 1987, when investors needed better ways to protect their portfolios through option insurance. These tools provide greater flexibility to trade and hedge volatile swings in Bitcoin prices effectively. The violation of constant volatility and the log-normality assumption of the Black–Scholes option pricing model led to the discovery of the volatility smile, smirk, or skew in options markets. These stylized facts; that is, the volatility smile and implied volatilities implied by the option prices, are well documented in the option literature for almost all financial markets. These are expected to be true for Bitcoin options as well. The data sets for the study are based on short-dated Bitcoin options (14-day maturity) of two time periods traded on Deribit Bitcoin Futures and Options Exchange, a Netherlands-based cryptocurrency derivative exchange. The estimated results are compared with benchmark Black–Scholes implied volatility values for accuracy and efficiency analysis. This study has two aims: (1) to provide insights into the volatility smile in Bitcoin options and (2) to estimate the implied volatility of Bitcoin options through numerical approximation techniques, specifically the Newton Raphson and Bisection methods. The experimental results show that Bitcoin options belong to the commodity class of assets based on the presence of a volatility forward skew in Bitcoin option data. Moreover, the Newton Raphson and Bisection methods are effective in estimating the implied volatility of Bitcoin options. However, the Newton Raphson forecasting technique converges faster than does the Bisection method.

Financial Fear Index in the Digital Financial Assets Market

The relevance of the research topic is due to the increasing role of non-traditional financial instruments that contribute to financial instability. Therefore, various indicators are required to reflect the situation in the digital financial assets market, the volatility quotes, and the level of investor confidence. The aim of the study is to develop and test on empirical data a generalized indicator of financial instability (financial fear index) in the digital financial assets market. The novelty of the research lies in the adaptation of the classic model of building the volatility index to the cryptocurrency market.The authors use statistical methods for collecting and processing data, analyzing time series, weighing, designing economic indicators. The paper summarizes the results of modern research on the correlation between digitalization and financial instability. The authors conclude that at certain short periods of 2020 the ruble-dollar volatility was comparable or even higher than the ruble-bitcoin one. In addition, there is much less fear and uncertainty in the cryptocurrency market today than there was at the end of 2018. The main result of the study is the financial fear index model based on the method of calculating the weighted average option price of the underlying asset and hedging of price risks. The model has been tested using data on the bid and ask prices of cryptocurrencies at a specific point in time. Estimates have been obtained indicating the growing instability in the digital financial asset market. The authors offer recommendations regarding the index threshold values, which indicate the level of investors’ fear.

Hedge effectiveness assesment in non-financial organizations: economic approach

The existing approaches to assessing the effectiveness of risk hedging with derivatives according to various criteria have been considered. As a result it was found that in economic literature it is not paid enough attention to the development of assessment methodology, which take into account the impact of risk hedging on the overall performance of the organization. In this regard, an economic approach to assessing the effectiveness of hedging has been proposed; it is based on the comparison two basic categories of the efficiency theory – the achieved effects and the associated costs. Within the framework of this approach the effects of hedging that affect the overallresult of the organization’s activities were proposed. Also the costs associated with hedging were systematized into external and internal. The essential content of the proposed economic approach is presented in comparison with other approaches, which contributes to understanding the criteria for assessment hedge effectiveness in each specific case. The application of the proposed economic approach in non-financial organizations will contribute to improving the quality of risk hedging by using performance assessment criteria that meet the current goals of the organization and the requirements of senior management.

Governance of Artificial Intelligence in Water and Wastewater Management: The Case Study of Japan

The integration of artificial intelligence into various aspects of daily life is developing at a rapid pace in Japan. Discussions to govern applications of artificial intelligence to the field of social infrastructure are also critical and need to match the rapid pace of development. However, the legal implications and risks of applying artificial intelligence to the management of lifelines such as drinking water supply and wastewater treatment have not yet been fully explored. This paper reviews the existing legislations and ongoing discussions on governance regarding applications of artificial intelligence to water and wastewater management. Based on the review, we discuss the ability of legislative frameworks in Japan to respond to the applications of artificial intelligence, as well as identifying potential gaps and challenges thereof, including access to accurate data, demarcation of rights and responsibilities, risk hedging and risk management, monitoring and evaluation, and handling of intellectual property rights. This paper concludes with key recommendations to national and local governments to support the application of artificial intelligence in the field of water and wastewater.

Pricing Wind Power Futures

AbstractWith increasing wind power (WP) penetration an extensive amount of volatile and weather dependent energy is fed into the German electricity system. To manage the volume risk of windless days and the transfer of revenue risk from wind turbine owners to investors, WP derivatives were introduced. These insurance-like securities allow the hedging of the volume risk of unstable WP production on exchanges such as NASDAQ and EEX. We present a modern and powerful methodology to model weather derivatives, with very skewed underlying assets, incorporating techniques from extreme event modelling to tune seasonal volatility. We compare transformed Gaussian and non-Gaussian CARMA(p, q) models. Our results indicate that the Gaussian CARMA(p, q) model is preferred over the non-Gaussian alternative. Out-of-sample backtesting results show good performance, with respect to benchmarks, employing smooth market price of risk (MPR) estimates based on NASDAQ weekly and monthly German WP futures prices. A seasonal MPR of a smile shape is observed, with slightly positive values in times of high volatility, for example, winter months, and negative values, in times of low volatility and production, for example, in summer months. We conclude that producers pay premiums to insure stable revenue steams, while investors pay premiums when weather risk is high.