The Use of Interest Rate Futures and Options by Corporate Financial Managers

Block, Stanley B.; Gallagher, Timothy J.

doi:10.2307/3664846

Cited by 103 publications

(62 citation statements)

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“…A would imply more hedging for R & D firms. Nance, Smith, and Smithson (1993), as well as Block and Gallagher (1986) and Wall and Pringle (1989), also find weak evidence that firms with more leveraged capital structures hedge more. To the extent that such firms have fewer unencumbered assets, and hence more difficulty raising large amounts of external finance, this finding also fits with our model.…”

Section: A Anecdotal and Survey Evidencementioning

confidence: 99%

Risk Management: Coordinating Corporate Investment and Financing Policies

Froot¹,

Scharfstein²,

Stein³

1993

The Journal of Finance

870

917

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This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving "nonlinear" instruments like options.CORPORATIONS TAKE RISK MANAGEMENT very seriously-recent surveys find that risk management is ranked by financial executives as one of their most important objectives.^ Given its real-world prominence, one might guess that the topic of risk management would command a great deal of attention from researchers in finance, and that practitioners would therefore have a welldeveloped body of wisdom from which to draw in formulating hedging strategies.Such a guess would, however, be at best only partially correct. Finance theory does do a good job of instructing firms on the implementation of hedges. For example, if a refining company decides that it wants to use options to reduce its exposure to oil prices by a certain amount, a BlackScholes type model can help the company calculate the number of contracts needed. Indeed, there is an extensive literature that covers numerous practical aspects of what might be termed "hedging mechanics," from the computation of hedge ratios to the institutional peculiarities of individual contracts.Unfortunately, finance theory has had much less clear cut guidance to offer on the logically prior questions of hedging strategy: What sorts of risks * Froot is from Harvard and NBER, Scharfstein is from MIT and NBER, and Stein is from MIT and NBER. We thank

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Section: A Anecdotal and Survey Evidencementioning

confidence: 99%

Risk Management: Coordinating Corporate Investment and Financing Policies

Froot¹,

Scharfstein²,

Stein³

1993

The Journal of Finance

870

917

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“…Earlier studies include Block and Gallagher (1986) and Dolde (1993). More recently Philips (1995), Bodnar, Hayt, Marston and Smithson (1995) and Marston (1996, 1998) described risk management practices by US firms.…”

Section: The Impact Of the Institutional Setting On Risk Managementmentioning

confidence: 99%

The Impact of Institutional Differences on Derivatives Usage: a Comparative Study of US and Dutch Firms

Bodnar

Jong

Macrae

2003

Euro Fin Management

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This paper tests the influence of institutional differences on risk management practices. Several survey studies have investigated derivatives usage for risk management purposes in the US (see, among others, Bodnar, Hayt, Marston and Smithson, 1995and Bodnar, Hayt and Marston, 1996. In this paper, we compare derivative practices of US and Dutch firms. This comparison is interesting because the institutional setting for Dutch firms differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and the reliance on financial markets. In a number of survey studies additional countries have been studied, such as New Zealand (Berkman, Bradbury and Magan, 1997), Sweden (Alkebäck and Hagelin, 1999) and Germany (Bodnar and Gebhardt, 1999). In contrast with these papers, we facilitate a comparison by applying a matching and a weighting strategy, which corrects for different distributions over industry and size classes in the Dutch and US samples. After these corrections, the remaining results can be attributed to institutional differences. We find that Dutch firms hedge more financial risk. Because of the greater openness of the Netherlands, Dutch firms experience far more foreign exchange exposure and hedge more currency risk. US firms have more concerns regarding derivative usage, which may be linked to the stricter disclosure requirements in the US. US firms also focus more on accounting earnings, which may be attributable to the shareholder orientation in the US versus the stakeholder orientation in the Netherlands. Whereas Dutch firms tend to rely on OTC-transactions, US firms use exchange-traded derivatives and therefore require a higher counter party rating for derivatives transactions. This distinction can be accredited to the differences in the financial environments between the US and the Netherlands. The aforementioned results indicate that institutional differences between the US and the Netherlands have a significant effect on the risk management practices and derivatives use of US and Dutch firms. JEL classification: F30; G15; G32

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“…The price at which the owner is allowed to buy that currency is known as the exercise price or strike price, and there are monthly expiration dates for each option. 3 Call options are desirable when one wishes to lock in a maximum price to be paid for a currency in the future. If the spot rate of the currency rises above the strike price, owners of call options can "exercise" their options by purchasing the currency at the strike price, which will be cheaper than the prevailing spot rate.…”

Section: Hedging With Currency Call Optionsmentioning

confidence: 99%

Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: <i>A Study on Advanced Chemical Industries (ACI)</i> in Bangladesh

Jahan¹

2016

IJEFM

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Abstract:Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. Although in Bangladesh, the use of currency derivatives to hedge foreign exchange risk is not popular among the existing firms engaged in foreign exchange transactions, there are a few firms such as ACI & General Motors etc with extensive foreign exchange-rate exposure and economies of scale in hedging activities are more likely to use currency derivatives. This is because, given the potential shifts in the supply of or demand for currency, firms and individuals who have assets denominated in foreign currencies can be affected favorably or unfavorably. These firms may want to alter their currency exposure in order to grab benefit or hedge risk from the expected movements of exchange rates. This study provides a detailed analysis along with a background on currency derivatives which are commonly used by some of large firms existing in Bangladesh in order to capitalize on or hedge against expected exchange rate exposures measured by these firms. In this paper, we have also divulged an analytical framework for measuring exchange rate exposures accelerating the use of currency derivatives in foreign exchange market of Bangladesh.

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The Use of Interest Rate Futures and Options by Corporate Financial Managers

Cited by 103 publications

References 1 publication

Risk Management: Coordinating Corporate Investment and Financing Policies

Risk Management: Coordinating Corporate Investment and Financing Policies

The Impact of Institutional Differences on Derivatives Usage: a Comparative Study of US and Dutch Firms

Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: <i>A Study on Advanced Chemical Industries (ACI)</i> in Bangladesh

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The Use of Interest Rate Futures and Options by Corporate Financial Managers

Cited by 103 publications

References 1 publication

Risk Management: Coordinating Corporate Investment and Financing Policies

Risk Management: Coordinating Corporate Investment and Financing Policies

The Impact of Institutional Differences on Derivatives Usage: a Comparative Study of US and Dutch Firms

Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: &lt;i&gt;A Study on Advanced Chemical Industries (ACI)&lt;/i&gt; in Bangladesh

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Measuring Efficiency of Using Currency Derivatives to Hedge Foreign Exchange Risk: <i>A Study on Advanced Chemical Industries (ACI)</i> in Bangladesh