Measuring market risk for an agricultural exporter firm: a Copula approach

Abstract

Purpose The purpose of this paper is to analyse the effect of market risk on the revenues perceived by an agricultural producer, namely, a coffee exporter firm. Design/methodology/approach To model this risk, copula models and extreme value theory are used to perform more robust estimations, which take into account the multivariate dependence between the risk factors. As a final point, different quantitative measures of risk, such as the value at risk and the expected shortfall, are estimated as an indicator of the maximum expected loss. Findings One of the principal findings is that for an agricultural exporter firm, there is an optimal decision between exporting to another country and selling the commodity in the national market. The choice regarding the levels exported will determine the firm’s amount of risk and expected return. Research limitations/implications One of the limitations found in modelling the risk/return of the firm is the data. Not much data on the structure of the firm can be found, and many of the firms are averse to providing such information. Practical implications The purpose of the paper is to create a measure of risk to analyse the future of the firm, generating a measure of expected risk and return that takes into account the uncertainty of the future. The applications can be applied to measure the risk of a potential investment and real option valuation. Originality/value This paper applied multiple coherent measures of financial risk to an agricultural commodity exporter firm. This can be novel, especially in the context of a non-financial firm.

Foreign exchange exposure in Latin America: evidence for Spanish firms

“…En esta línea, Geczy et al (1997) exponen que cualquier programa de cobertura debe evaluarse no sólo en función del nivel de exposición sino también de su coste, destacando la elección de los instrumentos que lo materializan. En este sentido, las empresas deben seleccionar un nivel de exposición óptimo según su rentabilidad esperada y riesgo asumido (Fernández, 2017). La literatura previa no ha alcanzado un consenso sobre qué estrategia de cobertura resulta más conveniente si bien, como se indicó en el marco teórico, ha constatado la gran popularidad de los productos derivados.…”

“…In this line, Geczy et al (1997) explain that any hedging programme must be evaluated based on the level of exposure and on its cost, highlighting the choice of the instruments used. Thus, firms have to select an optimum level of exposure, according to expected profitability and assumed risk (Fernández, 2017). Previous literature has not reached a consensus regarding which hedging strategy is the most convenient, even though, as indicated in the theoretical framework, it does confirm the popularity of derivatives.…”