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Concave risk-return tradeoff dictates a hedge ratio to be substantially less than the traditional risk-minimization one. Empirical validation confirms that actual industry hedge ratios vary significantly lower than what risk-minimization dictates.

The exponential GARCH model performs better than the ad hoc Black-Scholes (BS) model both in terms of in-sample valuation and out-of-sample forecasting. However, the superiority is insignificant except in the case of deep-out-of-money put options.

Trading in bond markets is usually regarded as significantly less exciting than trading in stock markets. The fixed maturities and coupons of bonds limit the possibility for speculation and the [...]

The author present a model relating hedging to stochastic volatility.

The anxiety over derivatives accounting continues unabated with the 2005 deadline for European listed companies to apply international accounting standards in their group accounts drawing nearer. Warren Buffett, investment guru, highlighted the concern about derivatives and described them in a letter to Berkshire Hathaway shareholders as 'financial weapon of mass destruction'.

The liquidity constraints are responsible for the termination of a hedge program, in the event of a certain threshold, exceeding the cumulative loss from a future position.

Generalized models of variance/covariance structure are used here to estimate dynamic futures-hedging ratios across seven markets. The resultant strategies are then compared against naive and static strategies, both in-sample and out-of-sample.

The problems of hedging long-term commodity positions, which often arise when the maturity of actively trade futures contracts on the commodity is limited to a few months, are highlighted. A one-factor term structure model of futures convenience yields is used to construct a hedging strategy that minimizes both spot-price and rollover risk.

In a market where information is freely available, we expect risk-averse investors to transfer risk to institutions with high risk-tolerance. In the capital markets, information on frequently traded liquid instruments [...]

Investment fund manager David Mobley of Maricopa Investments, located in Naples, Florida, is profiled. Mobley's questionable background, which includes an indictment for grand theft and several failed business ventures, is examined, and the murky structure of his financial empire analyzed.

This article presents a brief discussion of the motives for hedging strategic exposure and relates the theoretical work to a practical situation. The theory suggests that strategic exposure management can have a favourable impact on the firm's value. In practice, firms may pursue a limited number of hedging motives and the organisational arrangements within firms can have important impacts on the extent to which specified hedging motives can be pursued.

A research aimed at finding out if and when hedgers must use the Chicago Board of Trade to hedge hard red winter wheat has revealed that a producer who hedges will maximize utility by choosing Kansas City. Producers will choose the cash market to a hedge unless very risk averse or when hedging for a period of one month or more. Producers under the lower liquidity cost difference will not prefer Chicago when hedging.

Corporate managers have begun to embrace the concept of risk management vigorously. Some surveys indicate that 60% to 80% of large US firms have some sort of financial risk management [...]

The use of cross-option prices in evaluating future relationships between changes in the exchange rates of foreign currencies proves to be more effective than the use of historical measures. Empirical tests show that cross-option prices provide improved currency market estimates although they are not perfectly applicable in reality. Additionally, the information content of implicit beta hedge ratio of foreign currencies using cross-option prices is greater than that of historical hedge ratio.

Options on Treasury bonds or T-bills are not ideal alternatives for determining the value of interest rate caps since these may result in pricing error. Hedging instruments must also be carefully chosen because these may affect the pattern of cash flow of the interest rate exposure. The selection of fundamental securities for replicating complex securities have been done using a contingent claims framework for options of interest-rate contingent securities. The same has also been accomplished with a European put option on a T-bill for the earnings on an interest rate cap.

Effective risk management requires the development of portfolio analytics based on an understanding of risk. This is achieved by identifying the primary sources of risk in complex portfolios, or the 'hot spots,' and the trades that would reduce these risks, also known as the 'hedges.' To better understand and manage the risks in investment portfolios as well as in trading positions, some portfolio analysis tools have been formed, including hot spots reports, asset risk analysis, 'best hedges' report, relationship between best hedge and 'market exposure' and best replicating portfolios.

Oil and gas companies consider hedging as a valuable risk management strategy. Companies should realize that the benefits of hedging outweigh the costs. Failure to hedge can lead to cash flow problems in areas such as debt service, capital expenditures and maximization of investment opportunities. Oil and gas companies are advised not to hedge more than 85% of production from proved developed producing properties in any single year. Some guidelines on hedging are presented.

Mortgage bankers need a basic lesson in how to guard the value of servicing when interest rates are falling. Learning how chicken processors hedge their costs of feed to preserve [...]

The lognormal diffusion process is the most popularly used asset price process in the continuous-time financial theory. Discontinuity in the asset price as well as jump components in the market portfolio and exchange rates have been noted. An intertemporal futures hedging model is developed with mean-reverting basis, time-decay volatility and price and basis jumps. The derived intertemporal optimum hedge ratio could account for a more substantial set of realistic hedging behaviors than the conventional method.

Information plays a critical role in determining futures prices, hedging and speculation. For instance, economic agents need information on random economic parameters before making decisions on production and level of engagement in futures trading. Evaluating the distribution of the relevant random variable also employs economic signals. In some cases, however, a higher amount of information from each economic signal may lead to an equilibrium which is less beneficial, owing to a widespread observation of this signal.

The conventional definition of hedge ratio used by institutional investors when there are multiple cash assets is inappropriate. Defined as the ratio of the futures position to the cash position of the foreign asset, it lacks the usual meaning as in a single cash asset. No positive relationship between the magnitude of the conventional hedge ratio and the usefulness of the futures contract exists in the presence of multiple cash assets. Consequently, no information on the relative significance of currency hedging is offered by the comparison of hedge ratios.

More than 100 losses due to financial derivatives have been described in the media since the late 1980s. This reveals widespread public concern with these instruments and shows a need for their strict internal control. The losses are listed in reverse chronological order.

The responsibility for developing risk management practices rests with senior management. Derivative instruments can represent various kinds of risk, including market, credit, legal, operational and liquidity. Any of these kinds of risks can be dangerous for a company, so each must be addressed. Ways to address these different risks and to integrate such practices into the existing oversight system are detailed.

Derivatives have their root in traditional futures contracts. In 1972, the Chicago Mercantile Exchange began trading currency futures and the market for instruments like financial futures grew greatly during the 1980s. Regulators have been hard-pressed to keep up with such a dynamic market. The Commodity Futures Trading Commission was established in 1974 as the main futures regulator but this came to late after other agencies like the SEC already had an interest in this area. Problems have included inadequate calculation of risk and incomplete accounting standards. Progress in solving these problems is necessary.

Trading in derivatives can reduce social welfare by increasing the risks borne by derivatives traders and thereby reducing their welfare. Traders face not just risk but also uncertainty. Policymakers should determine at what point hedging and arbitrage become speculation for this is the point at which damage to the social welfare can result. Speculation is by its very nature a zero-sum game.

Some of regulators' problems in deciding how to handle derivatives also apply to regulating the whole financial services industry. Regulators must stroke a balance in this area because some risk is a necessary feature of capital markets. The elimination of risk would mean the elimination of returns to investors. Capital markets allocate risks to those most capable of handling it and package it in a manageable way. Regulators can help in this task.

Another corporate paradigm is necessary to determine corporate hedging policy. Pending this event, the expectations of a corporation's shareholders and associated data must supplement the existing corporate paradigm to create a corporation's hedging policy. Actual and potential shareholders should influence the decision of a corporation to hedge and once this decision is made, the corporation should disclose major components of the hedging policy and how these can be changed.