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Synopsis

The research problem

This study examines the association between hedge-based derivatives usage and stock price crash risk, as well as the moderating effect of International Financial Reporting Standard 9 — Financial Instruments (IFRS 9) hedge accounting requirements on the association between derivatives usage and stock price crash risk in China.

Motivation

A growing number of companies worldwide are using financial derivatives to hedge risks; however, evidence is mixed on whether hedge-based derivatives usage increases or decreases firm transparency. While prior studies have demonstrated that financial reporting complexity can affect the informational effect of derivatives, evidence is limited on whether and how the recent changes in hedge accounting requirements in IFRS 9 affect the capital market outcomes of derivatives. Using data from China, one of the largest emerging markets, we tested the informational effects of hedge-based derivatives usage and IFRS 9 requirements to provide incremental evidence on the market outcomes of firm use of financial derivatives. The findings have implications for international investors and facilitate the International Accounting Standards Board’s (IASB) postimplementation review of the IFRS 9 hedge accounting requirements.

The test hypotheses

Our first hypothesis is that no association exists between hedging and stock price crash risk in China. Our second hypothesis is that the implementation of IFRS 9 requirements does not influence the association between hedging and stock price crash risk in China.

Target population

This study is of interest to accounting and finance researchers, firm managers, accounting practitioners, international accounting standard setters, regulatory authorities, and investors.

Adopted methodology

Ordinary least squares (OLS) regressions, difference-in-differences (DiD) research design, propensity score matching (PSM), and entropy balancing (EB) are used in this research.

Analyses

We manually collected derivatives-related information (including purposes of derivatives usage, measurement basis of the derivatives, and hedge accounting treatment) from the annual reports of firms listed on the mainboard of the Shanghai and Shenzhen stock exchanges from 2016 to 2021. We adopted OLS and a DiD research design to test our hypotheses, and used the PSM and EB methods to address endogeneity concerns.

Findings

We find a positive association between hedging and stock price crash risk among the listed Chinese companies. Furthermore, after the implementation of IFRS 9, stock price crash risk decreases more among the hedgers than among firms without financial derivatives. Our channel tests show that IFRS 9 increases the quality of hedge accounting information, thus reducing stock price crash risk. The cross-sectional tests further support the capability of IFRS 9 to reduce noise contained in hedge accounting information, therefore improving firm-level transparency.

In response to the global transition to a low-carbon economy, carbon risk reduction in diversified portfolios has become imperative. We develop a new hedge approach to mitigate carbon risk, quantified as the carbon beta using a multi-factor model. By calculating a novel hedge ratio, investors are provided with an optimal allocation to a hedge asset, facilitating the effective reduction of carbon beta within their portfolios. Our findings highlight the effectiveness of this approach, which leads to carbon beta reductions without significant losses in risk-adjusted returns, implying that investors and fund managers can adopt this hedge strategy to moderate their carbon risk exposure. Compared to other carbon risk hedge methods, our approach only requires an investment in one more asset, making real-world applications relatively straightforward.

A weather derivative is financial instrument that companies or individuals use to hedge against the risk of weather-related losses. Freight derivatives value is derived from the future levels of freight rates, like a dry bulk-a category of cargo stowed in bulk, consisting of grain, cotton, coal, etc., carrying rates, and oil tanker rates.

Numerous empirical studies exist on weather and freight derivatives and their pricing models such as Indifference Pricing Approach, Arbitrage Pricing Model, Financial Pricing model, Benchmark Pricing Approach, Fair Pricing Approach, Actuarial Pricing, Consumer Based Pricing Method, and Index Modeling. This paper aims to address issues relating to the functioning of weather and freight derivatives.

This paper also focuses on the studies published on weather and freight derivatives’ pricing models during the last seven decades (i.e., 1950–2020).

Objectives:

• (1)To understand the vital issues relating to models of weather and freight derivatives.
• (2)To compare pricing models of weather and freight derivatives during the last seven decades (i.e., 1950–2020).

Seeing the firm as a nexus of activities and projects, we propose a characterization of the firm where variations in the market price of risk should induce adjustments in the firm's portfolio of projects. In a setting where managers disagree with respect to what investment maximizes value, changing the portfolio of projects generates coordination costs. We then propose a new role for financial risk management based on the idea that the use of financial derivatives reduces coordination costs by moving the organization's expected cash flows and risks toward a point where coordination in favor of real changes is easier to achieve. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management.

We study the exchange rate exposures of a sample of firms that undertake large acquisitions of foreign companies. Using data from Securities and Exchange Commission (SEC) filings on their foreign operations and derivatives usage, we examine how the exposures change from before to after the acquisition. We find that these deals generally lead to reduced currency exposure, which reflects the fact that most of the firms already have business in the target's country and the mergers serve as operational hedges. In contrast, we do not find a statistically significant effect for hedging with currency derivatives despite the fact that many of the firms in the sample use such instruments.

This paper delves into the interdependent relationship between China and Pakistan and its implications for regional interests. It centers on China’s expanding economic clout in South Asia, primarily through its collaboration with Pakistan. Using the theoretical framework of “hedging,” the paper examines Pakistan’s strategy for balancing its connections with both China and the United States. It also explores the role of small powers in alliance politics and how China’s growing economic and military sway in Pakistan may affect Pakistan-U.S. relations. Ultimately, the paper contends that the United States can mitigate the perceived risk of a Pakistan-China partnership by considering Pakistan’s unique geopolitical position and its intricate association with India.

This paper looks into the case of Southeast Asian states’ policy of hedging toward the U.S.-China competition. It examines Indonesian and Vietnamese similar approach to their respective relations with China and the United States in a shifting regional landscape, despite the fact that the two Southeast states have different ideologies and political systems. The authors argue that the fear of abandonment and entrapment drives the Southeast Asian states’ policy preferences to ensure that the United States and China accommodate their interests. Historical baggage, especially the negative historical experiences of both countries with the United States and China, also inhibits the formation of military alliances with the superpowers. This paper compares the two influential Southeast Asian countries in detail and avoids “regional generalizations” about the countries in the region.

In this paper, we first present a review of statistical tools that can be used in asset management either to track financial indexes or to create synthetic ones. More precisely, we look at two important replication methods: the strong replication, where a portfolio of very liquid assets is created and the goal is to track an actual index with the portfolio, and weak replication, where a portfolio of very liquid assets is created and used to either replicate the statistical properties of an existing index, or to replicate the statistical properties of a custom asset. In addition, for weak replication, the target is not an index but a payoff, and the replication amounts to hedge the portfolio so it is as close as possible to the payoff at the end of each month. For strong replication, the main tools are predictive tools, so filtering techniques and regression play an important role. For weak replication, which is the main topic of this paper, in order to determine the target payoff, the investor has to find or choose the distribution function of the target index or custom index, as well as its dependence with other assets, and use a hedging technique. Therefore, the main tools for weak replication are modeling (estimation and goodness-of-fit) and optimal hedging. For example, an investor could wish to obtain Gaussian returns that are independent of some ETFs replicating the Nasdaq and S&P 500 indexes. In order to determine the dependence of the target and a given number of indexes, we introduce a new class of easily constructed models of conditional distributions called B-vines. We also propose to use a exible model to fit the distribution of the assets composing the portfolio and then hedge the portfolio in an optimal way. Examples are given to illustrate all the important steps required for the implementation of this new asset management methodology.