Risk Hedging Research Articles

The Effect Of Credit Derivatives On Hedging Risk Of Non-Payment: Applied Research

The purpose of the current research is to reveal the impact of credit derivatives by (purchased credit derivatives, the value of credit derivatives sold) in hedging the risk of non-payment at a sample of commercial banks in the Iraq Stock Exchange by (Middle East Bank, Gulf Commercial Bank, Trade Bank of Iraq, Bank of Baghdad, Credit Bank) for the financial period from (2016-2020), and for the purpose of analyzing the results, the Office package was adopted (Excel.V.2016) in order to extract the level of credit derivatives, And the risks of non-payment at the commercial banks surveyed, has been using a set of statistical methods to determine these variables, represented in (credit derivatives, arithmetic mean, correlation coefficient, and regression coefficient), as a result, the research came out with a set of results, foremost of which was that there is an effect of credit derivatives in hedging the risks of non-payment, and this shows that credit derivatives contribute to improving the ability to hedge against non-payment risks, allowing investors to reduce financial risks. The focus of the surveyed commercial banks on the use of credit derivatives to protect investors from fluctuations in interest rates and currency rates, which works to reduce the impact of non-payment risks on their profits, which means that these contracts allow the determination of a future price for financial assets.

Hedging political risk in international portfolios

We show that internationally diversified portfolios carry sizeable political risk premia and expose investors to tail risk. We obtain political efficient frontiers with and without hedging political risk using a portfolio selection model for skewed distributions and develop a new asymptotic inference test to compare portfolio performance. Politically hedged portfolios outperform a broad market index and the equally weighted portfolio for US, Eurozone, and Japanese investors. Political risk hedging is not subsumed by currency hedging, and the diversification gains of politically hedged portfolios persist under currency hedging and transaction cost frictions. Hedging political risk induces equity home bias but does not fully explain the puzzle.

Legal regulation of risk hedging in financial markets using digital assets

This article is devoted to the consideration of issues related to the possibility of hedging risks using digital currencies and digital financial assets. The authors analyze the essence of hedging as one of the key factors of commercial activity, analyze its current legal regulation, identify financial risks that can be hedged, as well as the prospects for using digital assets as a risk management tool. The authors also determine some real cases of hedging transactions using digital assets.The authors believe that building a system of legal regulation in relation to hedging with digital assets should be aimed, first of all, at distinguishing hedging transactions and speculative high-risk transactions with financial instruments arising on the market.

Explainable machine learning for financial risk management: two practical use cases

We explore the potential of machine learning (ML) models applied in two financial risk management areas, i.e., credit risk management and financial risk hedging, through two practical use cases. This comparative study starts with the issue of explainability in complex ML models used in peer-to-peer lending for credit risk management. The first use case examines the limitations of using Kernel-SHAP with dependent features and evaluates different methods for estimating these dependencies using the Lending Club dataset. Our results suggest that accounting for feature dependence improves the understanding and robustness of prediction explanations. The second use case investigates a dynamic method for hedging foreign exchange risk in international equity portfolios, emphasizing the importance of accurate forecasts of currency returns. The analysis demonstrates that predictions yielded by ML models can significantly enhance the hedging of portfolios against currency risk. These findings highlight the transformative potential of advanced ML models in financial risk management, showcasing their capability to improve financial risk measurement and management. Further, our study outlines future research directions to advance this field.

Heedful proactivity: How individual tactical considerations contribute to pre‐screening of innovative ideas in the hierarchy

Purposefully fostering creativity and innovation through stimulating proactivity requires grappling with an apparent trade‐off. On the one hand, organization members need some autonomy to initiate change. On the other hand, managers might want to steer initiatives and retain control over outcomes. The current paper advances recent work on how proactivity is enacted as a compromise between autonomy and control by studying the process through which bottom‐up ideas are shared in highly hierarchical organizations. Based on an abductive analysis of data from informants in 42 organizations, we develop the concept of pre‐screening, which denotes collective action patterns geared towards qualifying individuals' innovative ideas before they are made subject to formal decision making. We explain how proactive individuals' tactical considerations—informed by their holistic prospective thinking, risk hedging, temporal splitting, and a both/and approach to proactivity and hierarchy—influence the actions through which ideas are shared and who are approached first (e.g., supervisors vs. peers). We also exemplify how action patterns accomplishing idea sharing and pre‐screening are entangled with more mundane workplace routines. Overall, the paper sheds new light on ideas' journeys in the context of hierarchy and opens up multiple avenues for future research.

Devil in FIPA: the motivations and consequences of frequent inter-industry portfolio adjustments in the Chinese mutual fund market

ABSTRACT Based on the equity asset allocation of Chinese open-end active funds, we examined the potential motivations and economic consequences of frequent inter-industry portfolio adjustments (FIPA) by funds. The research findings indicate that the fund tournament effect compels managers to engage in FIPA. Funds with higher managerial ownership exhibit lower levels of FIPA, suggesting that managers themselves do not favour FIPA. Instead, evidence suggests that fund managers cater to investors’ preferences for FIPA, but there exists an asymmetric effect between top-performing and underperforming funds. Specifically, top-performing funds attract more capital inflows after engaging in FIPA, while underperforming funds tend to engage in more aggressive FIPA, leading to net outflows of funds. Furthermore, the results exclude the motive of funds engaging in FIPA for risk hedging purposes. Finally, we explored the impact of FIPA on the stock market, revealing that fund FIPA delays the incorporation of negative company-specific information into stock prices, ultimately reducing stock price information efficiency.

Structural Effects of Economic Shocks on the Macroeconomic Economy–Electricity–Emissions Nexus in India via Long-Term Cointegration Approach

For developing nations to achieve net-zero targets, macroeconomic linkages impacting the decoupling of emissions from economic growth must account for non-linear business cycles and economic shocks. This study aims to delineate decarbonization policy pathways for the Indian electricity sector in the aftermath of COVID-19 by analysing the long-term evolution of the economy–electricity–emissions (3E) nexus during the 2008 financial crisis and during COVID-19, covering the period of 1996Q2 to 2020Q3. Upon testing multiple theoretical 3E systems, it was found that a model internalizing trade, inflation, and stochasticity was able to minimize the reproduction errors from growth to recession phases, as well as predict the rebound effect from an economic crisis. This was revealed to be due to more information within the coefficients in a trade stochastic model. Our results confirm the existence of electricity-associated emission decoupling with capital formation in the long-run, post-crisis, while economic growth and inflation increase CO2 emissions. The main finding highlights the negative feedback loop of inflation->trade->emissions, which shows that GDP and emissions are not directly causal. This long-run macroeconomic dynamic death spiral causes decoupling to be inhibited, where fossil fuel imports should not be subsidized for economic shock rebound, and the risk hedging of energy transition investments should occur in the post-COVID-19 era.

The convenience benefits of the shipping market: Evidence from C3 and C5 FFAs

Forward Freight Agreements (FFAs) are consequential derivatives for risk hedging in the shipping market. This paper presents the first empirical study of convenience yield in the shipping market with a sample of C3 (Tubarao to Qingdao) and C5 (Western Australia to Qingdao) FFAs from 2013 to 2023. First, single-factor and two-factor models are constructed to analyze the random behavior of freight rates in the shipping market, and the existence of convenience yield is empirically tested. The results provide evidence of the existence of convenience yield in the shipping market, with its stochastic variation being a critical factor in shaping the term structure characteristics of FFAs. Second, an ARMAX model is developed for the freight rate index, and the predictive role of the estimated convenience yield and its difference in spot freight rates is analyzed by operating the two-factor model. The findings reveal a significant predictive effect of convenience yield and its difference on spot freight rates. Last but not least, this study emphasizes the importance of convenience yield as a crucial parameter in the shipping market, particularly regarding the transportation of bulk commodities. Changes in the supply and demand of bulk commodities directly impact the fluctuations in shipping market capacity and convenience yield. This study delivers a new explanatory perspective for price formation in the shipping market and is highly valuable for risk management in this sector.

Mechanisms of interaction between banking institutions and aviation enterprises

It is shown that the main mechanisms of interaction between banks and aviation enterprises are: loans, leasing, collateral financing, risk hedging, project financing, financial consultations and services, factoring, guarantees and insurance. The global aerospace market has been proven to have significant growth potential due to an increase in global GDP, growth in global air traffic and record numbers of new aircraft orders. Innovation, efficiency gains and the development of new markets contribute to the sector's long-term positive outlook. It is shown that the aviation industry is subject to strict regulation at the national and international levels, including requirements for safety, ecology, product quality, data protection and many other aspects. Failure to comply with these requirements can result in serious legal consequences, financial loss and reputational damage. Long supply chains have been found to be an integral part of the aviation industry, ensuring the supply of components and materials for aircraft manufacturing. They have their own advantages and challenges that require effective management and coordination. The use of modern technologies, the development of partnership relations and strategic risk management contribute to increasing the efficiency and sustainability of these chains. It has been determined that the management of the risks of execution of key contracts is extremely important for aviation enterprises. Implementation of effective risk management strategies helps reduce the possibility of problems, ensure timely and high-quality fulfillment of obligations to customers, as well as maintain financial stability and competitiveness in the market. It has been proven that the interaction of banks and aviation companies brings numerous advantages to both parties. Aviation enterprises get access to the necessary financing, risk management and consulting services, which contributes to their development and increased efficiency. Banks, in turn, expand their customer base, increase profitability, develop new products and strengthen their reputation. Such cooperation is an important component of the success of both the aviation industry and the banking sector.

Meta-inventory management decisions: A theoretical model

The manufacturing industry leverages the traceability and visibility of Industrial 4.0 to integrate digital and physical twins for solving the intricacy of a production system. Physical entities can be converted into digital twins with smart IoT (Internet of Things) devices and computational techniques. Research efforts have generally focused on the development of digital twin models for basic practical applications. Advanced applications of digital twins have not been widely reported. An innovative use of digital twins for inventory management has only been analysed theoretically and reported as meta-inventory management for the first time by Wang and Huang (2023). This paper extends the novel concept of meta-inventory by using a theoretical Newsvendor model for original equipment manufacturing (OEM) and own brand manufacturing (OBM) factories. The impacts of meta-inventory on both supply chain members, including the factory and its downstream retailer, are investigated through two kinds of response models (e.g., hybrid and separate response models). Analytical and numerical results show that a factory achieves better performance by using a separate model since it clarifies the responsibility of digital twins. The hybrid response model holds a higher proportion of digital inventory, but its final profits are less than that in the separate model due to fewer orders and higher prices and costs of uncertainty. OBM can better leverage the advantage of digital twins than OEM. Also, both supply chain members benefit from the implementation of meta-inventory out of profit increase, price reduction, and risk hedging. This research provides guidance for manufacturing sites to implement digital twins and reduce their concerns on investing in meta-inventory.

Hedging global currency risk: A dynamic machine learning approach

We propose a dynamic method to hedge foreign exchange risk of international equity portfolios. The method is based on the currency return forecasts derived from a set of alternative machine learning models, built on the main factor components of the currency return time series. To illustrate our method, we take the perspective of a US portfolio manager investing in a global equity portfolio of developing and developed economies. The analysis of several model performance indicators, back-tested on data from 27 October 2008 to 30 December 2022, allows to conclude that accurate predictions of global currency factor returns, such as those obtained with non linear machine learning models, can improve currency risk hedging of global equity portfolios.

Trends and prospects for the development of the derivatives market in Russia under sanctions

Aim. To analyze trends on the derivatives market in Russia under sanctions and identify prospects for its development.Objectives. To study the theoretical basis and functions of the derivatives market; to analyze its current state in Russia, to assess the impact of sanctions on the dynamics and structure of the derivatives market; to identify trends and determine scenarios for its development in the Russian state under sanctions; to develop recommendations to improve the efficiency and development of the derivatives market under external pressure.Methods. The author applied the methods of analysis, synthesis, generalization, comparison, analogy, historical analysis. The analysis of publications with the subsequent interpretation has been carried out, the results of research have been summarized, on the basis of which the author’s understanding of the derivatives market development trends has been derived. Comparison of the existing opinions concerning the considered problems was carried out, statistical data were investigated.Results. Under the conditions of sanctions Russian banks, financial organizations, exporters and importers faced restricted access to international markets, there were changes in demand, there were needs for new instruments. Sanctions contribute to the development and implementation of new instruments in the derivatives market. The main scientific result of the work is to identify effective approaches to the development of the derivatives market under external pressure. The results of the study can be used in the practice of financial institutions, banks and government agencies to develop strategies and development of operations with derivatives.Conclusions. The derivatives market plays an important role in the Russian economy, performing the functions of risk hedging, price formation and contributing to the predictability of financial flows, which is especially important in the conditions of sanctions pressure. An assessment of the current state of the derivatives market in Russia has revealed significant changes in its structure and dynamics. The introduction of sanctions led to the introduction of new financial instruments, sanctions stimulated innovation and development of domestic infrastructure. The role of financial market infrastructural organizations, state institutions and the Bank of Russia is increasing. There is a growing interest in local and regional hedging instruments, increasing importance of the domestic market and markets of friendly countries. The prospects for the development of the derivatives market in the Russian state look promising if a number of steps are realized. Possible development scenarios include: further strengthening of internal infrastructure, simplification of accounting procedures, development of new financial products adapted to current conditions.

The role of hydrogen as long-duration energy storage and as an international energy carrier for electricity sector decarbonization

With countries and economies around the globe increasingly relying on non-dispatchable variable renewable energy (VRE), the need for effective energy storage and international carriers of low-carbon energy has intensified. This study delves into hydrogen’s prospective, multifaceted contribution to decarbonizing the electricity sector, with emphasis on its utilization as a scalable technology for long-duration energy storage and as an international energy carrier. Using Japan as a case study, based on its ambitious national hydrogen strategy and plans to import liquefied hydrogen as a low-carbon fuel source, we employ advanced models encompassing capacity expansion and hourly dispatch. We explore diverse policy scenarios to unravel the timing, quantity, and operational intricacies of hydrogen deployment within a power system. Our findings highlight the essential role of hydrogen in providing a reliable power supply by balancing mismatches in VRE generation and load over several weeks and months and reducing the costs of achieving a zero-emission power system. The study recommends prioritizing domestically produced hydrogen, leveraging renewables for cost reduction, and strategically employing imported hydrogen as a risk hedge against potential spikes in battery storage and renewable energy costs. Furthermore, the strategic incorporation of hydrogen mitigates system costs and enhances energy self-sufficiency, informing policy design and investment strategies aligned with the dynamic global energy landscape.

STATISTICAL METHODS FOR MANAGING RISKS IN PLANNING FOREIGN ECONOMIC AND LOGISTICS ACTIVITIES FOR SUSTAINABLE DEVELOPMENT OF THE ENTERPRISE

The article examines the topical issue of risk management in foreign economic and logistics activities, which is closely related to the enterprise’s chosen strategy and ensures its sustainable development. The study considers the issue of developing a hedging strategy using statistical methods since adequate forecasting allows predicting the impact of external environment factors on the exchange rate, which will allow the enterprise to timely predict and mitigate the risks in foreign economic and logistics activities. The authors have used general scientific and special methods of systemic and structural analysis to clarify the directions of sustainable performance and risk management tools; formulate the goals and steps in choosing a strategy of hedging; compare the methods of foreign exchange rate risk hedging and perform correlation and regression analysis of factors that impact exchange rate under crisis conditions. The purpose of the paper is to study the specifics of ensuring the sustainable performance of an enterprise using statistical methods in risk management for planning foreign economic and logistics activities. The authors have proposed a definition of a hedging strategy based on the concepts, approaches, and ideas of asset and/or investment management with the aim of reducing loss through hedging instruments, whose feasibility can be substantiated by statistical methods. It has been found that the formation and successful implementation of a hedging strategy requires the use of statistical analysis in order to timely predict fluctuations in exchange rates. The findings of the research were tested based on the performance of PrJSC "Linde Gas Ukraine". In the strategy of hedging the exchange rate risks, it has been proposed to simultaneously open a foreign currency deposit and take a loan in the national currency to replenish the company's working capital. The perspective of further research is the implementation of the proposed hedging strategy and assessment of its effectiveness.

Assessing the nexus between currency exchange rate returns, currency risk hedging and international investments: Intelligent network-based analysis

Through the exogenous growth model, the inflow of international investments promotes economic growth by the inclusion of foreign technologies in production functions and capital accumulation. But the proportional increasing outflow of international investments from emerging countries rapidly squeezes their economies. The main reasons of the massive gap between the inflow and outflow of international investments are devaluation of their home currency and inaccessibility of the foreign exchange derivatives instruments for potential currency risk hedging. The previous studies have strongly ignored the role of two-way multicurrency cross-risk hedging (MCCRH) in bilateral flows of international investments by conditioning effect of the currency returns. By considering the significance of the subject matter, it is needed to assess the interaction between two-way MCCRH, currency returns of multicurrency exchange rate returns (MCERRs) and bilateral flows of international investments, and conditional dependency of random variables of the intelligent network structure. The regression-based MLP and probabilistic Bayes intelligent neural networks represented that the two-way MCCRH and currency returns of MCERRs have a strong impact on bilateral flows of international investments in an emerging country. The constraint-based approach of the probabilistic Bayes intelligent neural network showed that the two-way MCCRH conditionally affects the bilateral flows of international investments given the percentage of currency returns of MCERRs. This study may assist policymakers and regulators to enhance currency returns and availability of foreign exchange derivatives instruments at the least cost to grab more intention of international investors for investments that will expand the economic growth of Pakistan.

CREDIT DERIVATIVES: TRADING PROTECTION

The article describes the main forms of credit derivatives, the evolution of their development and conditions of use. Particular attention is paid to the conditions of protection against credit risk. The authors demonstrate the possibility and expediency of using credit derivatives in the financial practice of Ukrainian companies in the context of transformation of the current legislation. It is established that credit notes, as a form of credit derivatives, are a more reliable financial instrument. From an economic point of view, they are considered to be securities with a certain set of risks and benefits for investors, which should be taken into account when developing a financial strategy for all capital market participants. The subject of the study is the intricacies of using credit derivatives in financial management, with a special emphasis on their role and conditions in modern Ukrainian financial practice. The research methodology includes a critical review of the existing literature combined with an analysis of the current use of credit derivatives in Ukraine. This approach offers a dual perspective that not only summarises the global context but also takes into account the nuances of local implementation. The purpose of this study is to investigate the effectiveness of credit derivatives as financial instruments for risk hedging and profitability optimisation. By examining different types of these instruments, the study aims to draw practical conclusions and provide recommendations for integrating these instruments into financial management practices in Ukraine. The research concludes that credit derivatives offer significant advantages as reliable financial instruments that contribute to risk management and economic development. The paper highlights their potential to positively impact financial market development, especially under conditions that facilitate risk hedging. The findings of the publication support the creation of a specific legislative and regulatory framework that would facilitate the wider introduction and efficient use of credit derivatives in Ukraine. This includes emphasising the need for specific amendments to existing tax codes and financial regulations to create a favourable environment for these instruments.

PROBLEMS AND PROSPECTS OF FINANCIAL DERIVATIVES MARKET DEVELOPMENT

The article studies the problems and prospects of the financial derivatives market development. Globalizing the economic space contributes to transforming the stock market into the principal source of capital allocation. Still, the current conditions of the derivatives market in Ukraine do not correspond to the needs of the national economy, which requires strengthening the regulation of their activities to ensure the hedging of risks of market participants. The article analyses the dynamics of derivatives trading in the global exchange market, assesses the dynamics of world exchange trading in financial derivatives, and analyses the turnover of OTC derivatives in the EU. It also studies the dynamic changes in the amounts paid under the terms of contracts for derivative securities in the world by maturity, region and industry sector; the dynamics of options and futures trading in the global exchange market. In this analysis, we examine the trading volumes of derivatives within the financial market of Ukraine. We estimate the volume of trading within both exchange and over-the-counter markets, and present the dynamics of exchange contracts as well as the share of financial instrument trading in the securities market. The factors hindering the development of the derivatives market in Ukraine are identified. These factors include legislative shortcomings, the current level of derivatives market infrastructure, and the current state of development of the underlying asset markets. The article also analyses the derivatives market and provides prospects for its development. To ensure the future development of the financial derivatives market in Ukraine, it is essential to take certain measures. These include comprehensive regulation of the derivatives market, ensuring the operation of regulated markets and building their infrastructure, and introducing appropriate instruments to protect participants and hedge risks.

Foreign investments of Japanese life insurance companies

We investigate Japanese life insurance companies’ investment returns or volatilities and their discretionary decisions on foreign portfolio investments. These decisions include the proportion of foreign investments in the companies’ proprietary investments and the currency risk hedge. We consider the “carry trade” scenario when the market favors investing in high-yield currencies by borrowing the Japanese yen. We establish three results. First, the currency hedge relates positively to the investment returns under the carry trade scenario but negatively otherwise. Second, the proportion of foreign investments relates positively to the investment returns. Third, the investment returns significantly decrease under the carry trade scenario.

Managing risk and reaping rewards: Climate‐change futures as a game‐changer for energy futures markets

AbstractClimate‐change futures provide a platform for low‐carbon portfolios and energy market risk hedging. Climate changes induce uncertainty in energy‐commodity markets. We investigate the potential of diversifying and hedging energy‐commodity market risk with climate‐change futures, using dynamic conditional correlation (DCC)‐ordinary least squares (OLS) incorporating quantile‐dummies and cross‐quantilogram (CQ) approaches. DCC‐OLS models reveal that the World and USA climate‐change futures exhibit that they can be diversifiers for oil, ethanol, gasoil, and gasoline. These futures also exhibit hedging features for natural gas, coal, and heating oil. Euro climate‐change futures demonstrate hedging capabilities for all energy commodities except oil and gasoil. World, USA, and Euro climate‐change futures have the potential to serve as safe‐haven financial instruments in the face of the high volatility of Brent crude oil, gasoil, and heating oil. The CQ reveals that World, USA, and Euro climate‐change futures exhibit hedging and safe‐haven capacity against oil, natural gas, coal, gasoil, gasoline, and heating futures. Climate‐change futures may protect financial investments during extreme volatility in energy commodities.

Optimization model of monthly continuous bidding transaction in electricity market considering risk hedging

In order to further alleviate the problems of large assessment deviations, low efficiency of trading organisation and difficulties in system optimisation in medium- and long-term market trading, the article proposes an optimisation model for continuous intra-month bidding trading in the electricity market that takes into account risk hedging. Firstly, the current situation of market players’ participation in medium and long-term trading is analysed; secondly, the impact of contract trading on reducing operational risks is analysed based on the application of hedging theory in the primary and secondary markets; finally, the continuous bidding trading mechanism is designed and its optimisation effect is verified. The proposed model helps to improve the efficiency of contract trading in the secondary market, maintain the stability of market players’ returns and accelerate the formation of a unified, open, competitive and well-governed electricity market system.