Risk Hedging Strategies Research Articles

Analyzing risk contagion and volatility spillover across multi-market capital flow using EVT theory and C-vine Copula

There exists a potential interdependence among the United States markets, alongside an exceptional dependence on the East Asian stock markets. This transmission of risks is similarly evident in funds that are traded within markets. The current study seeks to uncover the pathways of risk contagion among various financial markets. This study examines how risks of funds spread across borders among China, the United States, and East Asia using Extreme Value Theory (EVT) and C vine copula quantile regression. It uses models such as AR (1), EGARCH (1, 1), Peak over Threshold (POT), and Copula methods to predict volatility events and correlation patterns during times of high volatility versus regular periods. Notably, the United States exhibits a risk transmission effect on the East Asian market compared to China. Furthermore, the findings indicate that, in times of high volatility, the risk spillover effect is comparatively weak, which is contrary to the situation of the US market. The study suggests that China's financial impact could progressively rise due to initiatives aimed at sector integration and enhancing financial independence. These findings have enlightening consequences for macro-prudential regulatory agencies, emphasizing the necessity of effective regulation to address cross-border risk spillovers. International investors can benefit from these results by incorporating risk-hedging strategies, accurately evaluating derivatives, and making wise investment decisions.

Economic and risk based optimal energy management of a multi-carrier energy system with water electrolyzing and steam methane reform technologies for hydrogen production

This paper proposes stochastic programming to optimal economic scheduling problems of a sustainable integrated energy system with renewable resources including power, natural gas, and hydrogen carriers. Hydrogen is considered a byproduct of electrical power and natural gas carriers using water electrolysis and steam methane reform process technologies. The main objective is to minimize the operation and emission costs while addressing uncertainties of electric/heating/cooling demands, electricity price, and renewable generation using scenario-based stochastic programming. To achieve a risk-hedging strategy, downside risk constraints are involved to minimize the risky scenarios portfolio. The whole problem is modeled as mixed-integer linear programming in GAMS optimization software. The analysis revealed that the expected operation cost without DRC is $ 577.52 and the expected risk-in-cost value for risky scenarios is $ 470.7. However, a conservative decision for reaching zero risk is costly and increases the expected cost up to $ 2901.1, which is not economically viable. A modest decision-making strategy compromises the cost and risk values where for decreasing the risk-in-cost to $ 288.7 (36.8%), the expected cost increased by to $1010.39 (75.95%). Moreover, the risk-averse decision-maker lowers the power sold to the grid, increases the use of water electrolyzing instead of the SMR process to reduce the environmental charges, and tries to increase flexibility with the help of hydrogen and battery storage.

Socially responsible banking: Weathering the Covid-19 storm

This paper investigates the impact of socially responsible banking activities on banks’ risk profiles, using data from the period of turmoil caused by the Coronavirus (Covid-19) outbreak in Europe. Our findings show that socially responsible banking activities served as a risk-hedging strategy at the peak of the pandemic. Furthermore, we reveal the role of banks’ environmental and social engagement in reducing the exposure to country-level Covid-19 cases and public perception using a Google Trends sentiment analysis. Finally, in explaining the ESG-bank risk relationship, we identify a mediating role of the Covid-19 “panic” as a viable economic channel.

Z-number based fuzzy MCDM models for analyzing non-traditional security threats to finance supply chains: A case study from Vietnam

Non-traditional security (NTS) threats have a vast and profound impact on many aspects of economic, political, social, and many other areas, especially supply chain finance (SCF), particularly in countries like Vietnam, which potentially affects the economic efficiency of businesses' supply chain financial, thereby affecting the general economy of the country and the world. In order to prevent and minimize the negative impacts caused by NTS threats to SCF, this study was conducted to identify NTS threats affecting SCF in Vietnam, at the same time calculate the weight of the impact level and find out the cause and effect relationship between them. Solution strategies are also proposed and ranked, thereby serving as a reference basis for relevant parties to choose appropriate response solutions. Due to the multi-criteria nature of NTS threats, the multiple criteria decision-making (MCDM) method is used in combination with the Z-number concept and Fuzzy set theory to approach the problem of certainty and increase the accuracy of study. The NTS threats are first identified through a literature review and then validated for suitability using the DELPHI technique (DELPHI). Suitable threats will be determined by relationship, weighted by Decision Making Trial And Evaluation Laboratory (DEMATEL) method. Proposed strategies are ranked using the Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) method. The results indicate that there are 19 NTS factors affecting SCF in Vietnam, and the global economic downturn, pandemic and health crisis, financial crisis and cybersecurity risk are the four root cause factors with the most decisive influence. Businesses and concerns need to prioritize addressing these four threats because they not only have a strong impact but also entail many other threats. The two strategies considered to be the most effective are a sustainable practice and a risk-hedging strategy. Businesses, governments, and stakeholders also should pay attention to the macroeconomic environment, technology, and environment and build sustainable businesses, regularly monitoring economic fluctuations and creating plans to prevent risks.

Innovative optimal risk and economic management of a hybrid electric/hydrogen refueling station with water electrolyze and steam methane reform technologies for hydrogen supply

This paper proposes a stochastic programming for the economic operation of an electric/hydrogen refueling station. To reduce the carbon footprint, the charging station is connected to solar power generation, electrolyzer, and fuel-cell device to interlink the electric and hydrogen energies. Extra hydrogen is procured through an innovative steam methane reform process, which charges additional gas prices and emission penalties in return. The optimal scheduling minimizes the operation cost of the charging station and the emissions produced. The decision-maker faces uncertainties of electricity price, solar power generation, and vehicle demand that are modeled using stochastic programming. The innovative method based on conditional value-at-risk method is proposed to develop risk-hedging strategies addressing financial risks using economic management. With this respect, the risk-aversion strategies increased the expected cost from $ 322.97 to $ 388.71 (about 17 %) and decreased the difference between the expected cost and the cost of the worst scenario from $ 78.04 to $ 12.30 (about 84.23 %). Moreover, expected risk reduced from $ 24.63 to $ 1.23.

The Climate Effect on Colombian Coffee Prices and Quantities Based on Risk Analysis and the Hedging Strategy in Discrete Setting Approach

This paper provides a risk-hedging strategy for coffee markets including climate impact in the context of Colombian Coffee producers, companies, regulators, and policymakers. From the intermediaries' perspective, we present a hedging price and quantity risks using financial instruments based on price and weather variables (El Niño and La Niña phenomena). The coffee price and quantities produced are mitigated by the inclusion of climatic variables in two ways: first, through analysing the changes observed in the forward curve against spot price measuring the deterministic effect, known in this market as the forward risk premium. Second, including the weather index in the hedge structure on price and quantity in the coffee market improves the agent's result; this latter aims to improve the hedging claim's performance due to the link between demanded volume and weather-linked index. An experiment shows the strategy profit over the best-performing claim price derived only and without hedging.

Risk hedging for VaR-constrained newsvendors

Risk management significantly impacts the efficiency of business operations. We examine the effects of corporate risk preference on optimal ordering and risk-hedging decisions under a value-at-risk (VaR) constraint from short-term (only demand is uncertain) and long-term (both demand and supply are uncertain) perspectives. We find that under the short-term view, the impact of the shortage cost on the optimal order quantity is weaker than that of the unit net residual value. Moreover, managers can achieve a balanced management of profit and risk by using inventory to maximize profit and selecting the right option to hedge risk. Specifically, risk-averse firms can manage risk by selling a sufficient number of put options with a low enough strike price. On the other hand, risk-seeking firms should sell an adequate number of call options with a high enough strike price to meet the VaR constraint. In the long-run, we broaden the scope of applying optimal risk-hedging strategies for firms with different risk preferences. The optimal risk-hedging strategies within a specific range will be consistent with short-term ones. Otherwise, any option that satisfies the VaR constraint can be used to control risk. Our results enrich the literature on profit-risk hedging and ordering decisions based on the newsvendor model with the VaR constraint. They also help firms manage their inventories and control risk simultaneously. It is of great value to firms that are not only interested in short-term benefits but are more focused on the long-term increase in firms’ value.

Research on Trend Investing Strategy and Hedging Strategy

An investment method based on traditional subjective judgments faces huge challenges, while the strategy of quantitative investment is to find the optimal alpha model to judge the best timing of selling and buying and designing the most effective investment portfolio. Therefore, compared with traditional investment methods, quantitative investment breaks through the limitations of subjective judgment with its qualitative and quantitative advantages. The futures market attracts many investors with its low transaction costs and the two-way nature of transactions. However, most of the investment strategies that are frequently used in the market have low stability and do not guarantee correlation with the general market trend. This makes the investments risky, particularly for individual investors. Therefore, this paper will explore both futures investment and risk hedging strategies, aiming to ensure that every buy and sell is the correct choice as much as possible, such that futures investment is relatively stable and has high returns. This article focuses on using the moving average cross strategy through the python programming language to achieve the judgment of buying and selling in the process of futures trading and drawing the net worth curve of the real-time futures market data and perform a correlation analysis to determine which commodity sector is the most suitable using the trend strategy. For risk hedging, the article mainly uses the correlation analysis to study the relation between the prices of different types of futures. Furthermore, the futures and options market price fluctuations are discussed in depth, and also analysed is how to use and balance hedge parameters for risk hedging.

Production Planning with Risk Hedging Under a Conditional Value at Risk Objective

Effective management of demand risk is a central problem of production planning. In many applications, it is observed that demand often depends on certain asset prices in the financial market. This calls for a model that jointly optimizes the production decision along with a risk hedging policy, using the latter to compensate for loss of profit in scenarios of weak demand. In “Production Planning with Risk Hedging under a Conditional Value at Risk Objective,” Wang and Yao develop an integrated production and risk hedging model, where the risk hedging strategy is derived in explicit form and the production quantity is solved as a concave maximization problem. Furthermore, a complete characterization of the efficient frontier is provided, and the improvement over the production-only decision is quantified.

Nonlinear granger causality between natural gas and heating oil prices and selected exchange rates

Purpose: The currently observed uncertainty in financial markets related to changes taking place in the modern world requires investors to look for tools that allow for good forecasting of the price of financial instruments. The detection of causal relationships may contribute to improving the quality of forecasts by reducing the variance of the prediction error. The aim of the research is to detect nonlinear Granger causality in both directions between selected financial instruments and to check whether the identified relationships are stable over time. Design/methodology/approach: The study of causal relationships between selected financial instruments was carried out using the nonparametric Diks-Panchenko test. This test identifies all types of relationships: linear and nonlinear. Findings: In the first phase of the study, nonlinear Granger causality was tested using the nonparametric Diks-Panchenko test. Six values of lags and two distance measures were used. It is then shown that the significance of the detected relationships has changed in recent years. For this purpose, two directions of causality and three sub-periods were analyzed. Research limitations/implications: Due to the short-term character of the detected relationships, they should be taken into consideration primarily by market participants, to create effective investment portfolios and risk-hedging strategies. Practical implications: Application in making investment decisions on the capital market. Originality/value: The use of information on causal relationships to improve the quality of forecasts related to the energy and currency markets. Keywords: nonlinear Granger causality, Diks-Panchenko test, heating fuel market, exchange rates. Category of the paper: Research paper.

The contingent effect of supply chain strategies on the relationship between supply chain integration and operational performance in manufacturing context

PurposeThe purpose of this paper is to investigate the contingent effect of supply chain strategies on supply chain integration (SCI)-performance relationship in manufacturing organizations.Design/methodology/approachThis research hypothesized the moderation effect of agile, responsive, risk-hedging and efficient strategies on the relationship between SCI and operational performance (OP). Survey data were collected from a sample of 112 Egyptian manufacturing firms and analyzed using moderated regression analyses to test the study hypotheses.FindingsThe results provide supporting evidence that the four strategies moderate the relationship between internal integration (II) and OP. The results also indicated that agile strategy moderates the relationship between customer and supplier integration and OP. Besides, the results indicated that responsive strategy moderates the effect of customer integration (CI) on OP. Finally, the results did not provide sufficient evidence regarding the moderating effect of risk-hedging strategy on supplier integration (SI)-performance relationship.Research limitations/implicationsThe nature of the surveyed sample and the use of a single informant might limit the ability to generalize the research findings outside the research context.Practical implicationsThe research results provide managers of manufacturing organizations with the roadmap to maximize the benefits from their integrative efforts through emphasizing the appropriate supply chain strategy (SCS) with respect to the market demand/supply conditions.Originality/valueThis paper contributes to knowledge by empirically validating the contingent effect of SCS on the relationship between SCI and OP.

Volatility spillover effects of oil, gold and bulk shipping prices on financial markets

Abstract The volatility spillover effect plays an increasingly important role in the transmission of shocks mainly in recent periods, with the further advance of globalization and the rapid development in international linkages. This analysis of the interconnections between economic and financial markets has particular importance for investors in risk hedging strategies and portfolio diversification. Moreover, current turbulent periods, characterized by a volatile oil price, instability of gold price and supply bottlenecks caused by the outbreak of the COVID-19 pandemic impose the necessity to study this effect. The novelty brought by this paper is related to the analysis of the spillover effect coming from oil, commodity and bulk shipping markets to financial markets of Eastern-Europe emerging markets, namely Czech Republic, Hungary, Poland and Romania. To assess this effect, in this study it was implemented a widely used model in research papers model, more exactly the bivariate GARCH-BEKK (1,1) from the period July 2012 – February 2022. The results suggest the long-term memory of volatility in these markets, while direct interconnection and unidirectional spillovers effects are expected to be underlined by the volatility of gold returns on the stock markets returns.

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.

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.

Risk hedging strategies for electricity retailers using insurance and strangle weather derivatives

With the increase of extreme weather events and the penetration of distributed energy resources, electricity retailers will encounter more risks at both transmission and distribution levels during the business operation process. For risks at the transmission level, huge damages to the transmission lines and towers caused by extreme events, like bushfires, ice storms, and flooding, will lead to power shortage. For risks at the distribution level, demand variations in accordance with temperature change will result in energy procurement difficulty for the retailers. In this paper, besides the normal bilateral contract, the insurance, the strangle weather derivatives, and the energy storage system are implemented to hedge the risks at both the transmission and distribution levels. Simulation results show that the proposed model ensures higher profits for the retailers in summer and winter compared to the conventional model when there are no extreme events occurring. When there are extreme events in both summer and winter, the proposed model incurs lower reduction of profits than that of the conventional model. In brief, the overall profits of the retailer using the proposed hedging model are higher than the convention model, and the overall profit variation of the conventional model is about 26% higher than the proposed model. Furthermore, when the budget of the retailer is sufficient, all three hedging tools can be invested. Whereas when the budget of the retailer is limited, the investment order should be insurance the first, strangle weather derivatives the second, and energy storage system the third.

Institutionalizing Personalism: The Russian Presidency after Constitutional Changes

Abstract The 2020 constitutional changes considerably increase presidential powers while sending mixed signals about presidential transition. The main driver of the amendments were term limits. The “zeroing” of Putin’s presidential terms enhances certainty for himself by fostering uncertainty for others. But there is more to the amendments: Numerous changes are not new, they simply align the constitutional text with subconstitutional powers the presidency had been accumulating. The embedding of term limit circumvention in a comprehensive constitutional overhaul is a risk-hedging strategy to avert resistance by weakening the signal about Putin’s intentions. Constitutional changes are therefore an instrument of elite coordination. The amendments also increase presidential flexibility. This expedited regime personalization is detrimental to governance and will make repression more prevalent. But it also creates more risks for Putin. Regardless of how presidential succession will play out, Putin’s legacy will be a highly personalized authoritarian regime with a constitutionally unconstrained presidency.

Национальная климатическая политика: концептуальные основы и проблемы адаптации

Global climate change threatens the continued existence of mankind. The rate of warming in Russia, which is 2.5 times higher than the rate of growth of the global average temperature, can lead to huge environmental and financial losses. Thus, it is increasingly necessary to modernise and develop methods and tools for adaptive regulation of national climate policy to increase its efficiency at the regional and federal levels. To this end, the methods of content analysis, grouping, modelling, comparative and correlation analysis, as well as an information asymmetry approach were used in the research. The paper substantiates the necessity of a transition from autarky and directionality to the integration of regions and the federation based on adaptation and preventive measures. The periodic assessment of climate change and relevant contributing factors should be replaced by the continuous management and regional monitoring of climate risks. Stressing the importance of transparency and comparability of information on climate risks, the research distinguished anthropogenic risks, risks of reducing the quality of life and moral climate risks. In order to promote climate preservation, an organisational and economic mechanism for the implementation of climate policy was developed, whose main function is the regional environmental management. Assessment of the decoupling effect and ranking of the constituent entities of the Russian Federation in terms of the relationship between energy intensity and climate intensity proved the feasibility of using the proposed indicators to increase the efficiency of the organisational and economic mechanism. Regulatory and financial support for the mechanism can be provided by introducing a quota market, green certificates and bonds, insurance and risk hedging strategies based on a scenario approach and online-management models. The research results can be used for the digitalisation of national climate policy, as well as for the development of regional and municipal climate strategies, programmes, projects.

Towards robust investment decisions and policies in integrated energy systems planning: Evaluating trade-offs and risk hedging strategies for remote communities

Policy and investment decisions in developing clean energy strategies for remote communities are subject to multiple uncertainties that impact overall strategy outcomes, including those related to environmental emissions and energy costs. In this context, robust modeling approaches are required that can clarify potential outcomes while subject to such uncertainties. This work introduces a novel modeling framework that enables enhanced decision making in energy systems planning for remote communities, which for the first time takes into account context-specific decision-maker attitudes towards multiple inter-related uncertainties and various energy solution philosophies. In particular, multiple energy system configurations are evaluated by simultaneously minimizing the levelised cost of energy and fuel consumption, with a test case for a specific community in the Northwest Territories, Canada. The concept of model robustness and validity together with the stochastic nature of uncertain parameters are combined in a multi-objective optimization framework that elucidates the full spectrum of energy solutions available in such a remote Arctic context. Introducing known uncertainties in renewable energy characteristics was found to reduce overall energy yields from the renewable energy technologies. Specifically, the deterministic renewable energy penetration of 69% from a specific energy system configuration reduced to a mean of 51% after the inclusion of uncertainties via probabilistic simulation. Conversely, diesel fuel consumption increased to 750,000 L/yr (mean) from its initial deterministic value of 447,470 L/yr. Holistic energy solutions which include both supply and demand-side considerations are also analyzed. Specifically, a reduced community domestic heating load of 40% was achieved via retrofit of high performance building fabric enclosures evaluated in conjunction with renewable energy supply options. Ultimately, insights and real-world applications have been synthesized to provide coherent recommendations on strategies to address energy security, energy affordability and environmental sustainability, along with meaningful propositions towards Indigenous community-led energy projects in a range of contexts.

Market Risk Hedging Strategy and Financial Performance at Nigeria Stock Exchange Listed Banks

The main objective of the study was to determine the Market Risk Hedging strategy and financial performance of listed banks at Nigeria Stock Exchange (NSE). Contingency theory and Agency theory were used to expound on the effect of market risk hedging strategy and financial performance. Longitudinal cross sectional survey research design was adopted. The study’s target population includes all the 28 listed banks at Nigeria stock exchange. Data was collected from 2009 to 2018 for 20 listed banks in Nigeria. The secondary data sources for the period of between 2009 and 2018 were collected from Nigeria Stock Exchange and annual reports and accounts of the listed banks. The data was collected from audited financial statements of listed banks and other relevant internal report. Data collected was subjected to diagnosis tests of normality, autocorrelation, multicollinearity, linearity, homoscedasticity, stationarity, fixed and random effects. Correlation analysis was carried out to establish the relationship between the dependent and independent variables. Generalized Least Squares (GLS) regression analysis model was used to establish the relationship and significance between the study variables. The formulated hypotheses were tested. STATA statistical software version 10 was used for data analyses. The study found out that there are positive relationship between market risk hedging strategy and price earnings ratio which is the measure of financial performance of the listed banks at NSE. Based on the findings, the study concluded that Market Risk Hedging Strategies have a significant effect on financial performance of listed banks at NSE. The study recommends that there is need for the listed banks to effectively manage their risk as it was found that risk management positively influence financial performance of listed banks. The study further recommends that there is need for the management of listed banks to constantly check their banks’ exposure to credit risk, insolvency risk, and interest rate sensitivity. Keywords: Market Risk Hedging, Financial Performance. DOI: 10.7176/EJBM/12-15-11 Publication date: May 31 st 2020

The financialization of Chinese commodity markets

This study investigates the financialization of China's futures market from a market-integration perspective. First, this study examines the integration between the commodity market and financial capital markets (stock/bond/foreign exchange markets) by using multivariate GARCH models. We find that China's commodity futures market, especially the energy futures market, has financialization phenomenon. Moreover, the energy futures market plays a leading role in the integration between the commodity and stock markets. Considering that commodity market financialization is intimately associated with financial investment, this study analyzes the optimal intermarket risk hedging and asset allocation strategies between commodities and financial assets during its financialization.