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Price Risk (price + risk)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	93%

Distribution within Business, Economics, Finance and Accounting

General & Introductory Finance & Investments	43%
Agricultural Economics & Resource Management	35%

Selected Abstracts

The Simultaneous Hedging of Price Risk, Crop Yield Risk and Currency Risk

CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS, Issue 2 2000
Govindaray N. Nayak
This study analyzes the joint hedging decision of a Canadian firm in U S. based price and yield futures. The key results of this study are that jointly hedging price and yield can reduce more revenue risk than hedging only with price futures. For offshore hedgers, the evidence shows that foreign exchange risk is important and can be reduced by jointly hedging in the currency futures markets. Nous analysons les décisions de couverture multiple d'une entreprise canadienne contre les risques afférents aux prix et aux rendement à terme. Les conclusions clés de l'étude sont qu'une couverture simultanée contre ces deux risques peut accorder une meilleure protection qu'une couverture établie seulement contre les risques des prix à terme. Pour ceux qui font affaire avec un pays étranger, l'expérience montre que le risque afférent au taux de change est important et qu'il est possible de le réduire en se couvrant en m,me temps contre les risques affectant la valeur à terme de l'argent. [source]

Jumping hedges: An examination of movements in copper spot and futures markets

THE JOURNAL OF FUTURES MARKETS, Issue 2 2006
Wing H. Chan
Price risk is an important factor for both copper purchasers, who use the commodity as a major input in their production process, and copper refiners, who must deal with cash-flow volatility. Information from NYMEX cash and futures prices is used to examine optimal hedging behavior for agents in copper markets. A bivariate GARCH-jump model with autoregressive jump intensity is proposed to capture the features of the joint distribution of cash and futures returns over two subperiods with different dominant pricing regimes. It is found that during the earlier producerpricing regime this specification is not needed, whereas for the later exchange pricing era jump dynamics stemming from a common jump across cash and futures series are significant in explaining the dynamics in both daily and weekly data sets. Results from the model are used to under-take both within-sample and out-of-sample hedging exercises. These results indicate that there are important gains to be made from a time-varying optimal hedging strategy that incorporates the information from the common jump dynamics. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:169,188, 2006 [source]

Commodity price stabilisation: macroeconomic impacts and policy options

AGRICULTURAL ECONOMICS, Issue 1 2000
Chinna A. Kannapiran
Abstract A macroeconometric simulation study is undertaken to evaluate the impact of commodity price stabilisation (CPS) schemes for the export tree crop industry in Papua New Guinea. The findings suggest that there is a negligible level of favourable macroeconomic impacts of CPS. Contrary to the expectation, CPS adversely affects the stability of monetary and external sectors (BOP). CPS policy has failed to stabilise the macroeconomy. The price stabilisation policies are no longer appropriate from the macroeconomic point of view. Technical change, futures market and rural savings are the possible alternative policy options to manage the price risk. [source]

INVESTMENT RISK AND THE TRANSITION INTO HOMEOWNERSHIP,

JOURNAL OF REGIONAL SCIENCE, Issue 2 2007
Tracy M. Turner
R0; D12; D84 ABSTRACT This paper investigates the extent to which house,price uncertainty affects the transition of renter households into homeownership. Using a 14-year household panel from the Panel Study of Income Dynamics during the years 1984,1997 and measures of the time-varying risk and return to owner-occupied housing, we estimate a Cox proportional hazard model of the effect of house,price volatility on the transition into homeownership. Results indicate that house,price uncertainty has a negative and dramatic impact on transitions into homeownership. In addition, we find that the low-wealth renters are particularly sensitive to house,price risk. [source]

UK Fixed Rate Repayment Mortgage and Mortgage Indemnity Valuation

REAL ESTATE ECONOMICS, Issue 2 2002
José A. Azevedo-Pereira
We use a mean-reverting interest rate model and a lognormal house price diffusion model to evaluate British fixed rate repayment mortgage contracts with (embedded) default and prepayment options. The model also provides values for capped mortgage indemnity guarantees and the corresponding (residual) lender's coinsurance. Since the partial differential equation incorporating the general features of these mortgage contracts does not have a closed-form solution, an explicit finite difference method is used for the valuation (and sensitivity) results, with solution improvements to deal with error bounds. Then we provide graphical representations of each mortgage component as a function of house prices and interest rate levels, along with interpretations of the analysis. We calculate precisely the lender's (residual) exposure to house price risk, given the borrower's options, house and interest rate uncertainty, and customary mortgage indemnity insurance for high loan/collateral ratio mortgages. [source]

WHY MOST FIRMS CHOOSE LINEAR HEDGING STRATEGIES

THE JOURNAL OF FINANCIAL RESEARCH, Issue 2 2009
Dennis Frestad
Abstract I investigate the efficiency of alternative hedging strategies of nonfinancial firms facing hedgeable price risk, unhedgeable quantity risk, and financial contracting costs in low-profit events. The analysis suggests that variance-minimizing hedging strategies are very close in economic terms to optimal, value-maximizing hedging strategies for most firms. Furthermore, the marginal gains from shifting to nonlinear hedging strategies are often small enough to be neglected. These results illuminate some puzzling findings in survey studies of firms' hedging practices and suggest an alternative view on firms' selective hedging practices termed "cautious selective hedging." [source]

On the exit value of a forward contract

THE JOURNAL OF FUTURES MARKETS, Issue 2 2009
Gabriel J. Power
Default risk associated with forward contracts can be substantial, yet these financial instruments are widely used to hedge price risk. An objectively priced exit option on the forward contract would help reduce the likelihood of litigation associated with contract default. A method is proposed to compute the exit option's value for an arbitrary forward contract, using Black's (1976) model and option premium data. The time series dynamics of the exit option value are confirmed to be, like its underlying, well described by a martingale with heavy-tailed (Student) GARCH residuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29: 179,196, 2009 [source]

Hedging under counterparty credit uncertainty

THE JOURNAL OF FUTURES MARKETS, Issue 3 2008
Olivier Mahul
This study investigates optimal production and hedging decisions for firms facing price risk that can be hedged with vulnerable contracts, i.e., exposed to nonhedgeable endogenous counterparty credit risk. When vulnerable forward contracts are the only hedging instruments available, the firm's optimal level of production is lower than without credit risk. Under plausible conditions on the stochastic dependence between the commodity price and the counterparty's assets, the firm does not sell its entire production on the vulnerable forward market. When options on forward contracts are also available, the optimal hedging strategy requires a long put position. This provides a new rationale for the hedging role of options in the over-the-counter markets exposed to counterparty credit risk. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28: 248,263, 2008 [source]

Revisiting the empirical estimation of the effect of margin changes on futures trading volume

THE JOURNAL OF FUTURES MARKETS, Issue 6 2003
Hans R. Dutt
This study revisits the empirical estimation of the effect of margin requirements on trading volume. Although theory suggests that margin requirements impose a cost to traders and will therefore likely reduce volume traded, empirical examinations have generally failed to find this association. The contention of this article is that the theory is correct, but empirical estimation has generally neglected to adjust margins for underlying price risk. After adjusting for risk, this analysis finds economically and statistically significant negative effects of margin requirements on trading volume as predicted by theory. This study examined 6 contracts over a 17-year time period and found that financial futures contracts (gold, Dow Jones, and 10-Year Treasury Notes) were considerably more sensitive to changes in margin requirements than agricultural futures (wheat, corn, and oats). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:561,576, 2003 [source]

Risk Management in Agricultural Markets: A Review

THE JOURNAL OF FUTURES MARKETS, Issue 10 2001
William G. Tomek
This article surveys and evaluates the current state of knowledge about producers' marketing strategies to manage price and revenue risk for farm commodities. The review highlights gaps between concepts and their implementation. Many well-developed models of price behavior exist, but appropriate characterization and estimation of the probability distributions of commodity prices remain elusive. Hence, the preferred measure of price risk is ambiguous. Numerous models of optimal marketing portfolios for farmers have been specified, but their behavior appears to be inconsistent with most, if not all, of these models. In addition, some research suggests that farmers can earn speculative profits, which is inconsistent with notions of efficient markets. The conclusions discuss what academic research can and cannot accomplish in relation to assisting producers with risk-management decisions. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:953,985, 2001 [source]

Effect of yield and price risk on conversion from conventional to organic farming,

AUSTRALIAN JOURNAL OF AGRICULTURAL & RESOURCE ECONOMICS, Issue 3 2009
Szvetlana Acs
Although the benefits of organic farming are already well known, the conversion to organic farming does not proceed as the Dutch government expected. In order to investigate the conversion decisions of Dutch arable farms, a discrete stochastic dynamic utility-efficient programming (DUEP) model is developed with special attention for yield and price risk of conventional, conversion and organic crops. The model maximizes the expected utility of the farmer depending on the farmer's risk attitude. The DUEP model is an extension of a dynamic linear programming model that maximized the labour income of conversion from conventional to organic farming over a 10 year planning horizon. The DUEP model was used to model a typical farm for the central clay region in the Netherlands. The results show that for a risk-neutral farmer it is optimal to convert to organic farming. However, for a more risk-averse farmer it is only optimal to fully convert if policy incentives are applied such as taxes on pesticides or subsidies on conversion, or if the market for the organic products becomes more stable. [source]

Developing Hedging Strategies for Québec Hog Producers under Revenue Insurance

CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS, Issue 1 2004
Jean-Philippe Gervais
The paper investigates the optimal hedging strategies of Québec hog producers when they participate in a publicly funded revenue insurance program known as ASRA (Régime d'assurance-stabilisation des revenus agricoles). A forecast model of local cash and futures prices is built and Monte Carlo methods are used to derive the optimal futures and option positions of Québec hog producers. The positive correlation between forecasts of futures and cash spot prices induces positive sales of futures and put options to hedge price risk. ASRA provides put options to hog producers at actuarially advantageous terms. Producers can increase the expected utility of profits by selling back a portion of these put options using financial markets. Options are attractive to manage price risk given the nonlinearity in the profit function induced by the revenue insurance scheme. Speculative incentives to use futures and options are also discussed in the context of ASRA. Les auteurs ont examiné les meilleures stratégies de régulation pour les producteurs de porc québécois adhérant au programme d'assurance-revenu financeé par l'administration publique (ASRA). Ils ont bâti un modéle de prévision pour les prix au comptant et les prix à terme locaux puis appliquéé les méthodes de Monte Carlo pour voir comment les éleveurs de porcs québécois peuvent obtenir les prix d'option etles prix â terme optimaux. La corrélation positive entre les prix é terme et les prix au comptant favorise les ventes â terme et les options de vente pour une meilleure régulation des risques associés aux prix. L'ASRA permet aux producteurs de prendre des options â des termes avantageux sur le plan actuariel. Les éleveurs peuvent accroître la valeur prévue de leurs bénéfices en cédant une partie de ces options sur les marchés financiers. Les options sont intéressantes pour gérer les risques liés aux prix â cause de la non-linéarité que le programme d'assurance-revenu induit dans la fonction «bénéfices ». Les auteurs abordent aussi le probléme de la spéculation sur le marchéâ terme et le marché des options dans le contexte de l'ASRA. [source]

Does Risk Management Add Value?

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2005
A Survey of the Evidence
The fact that 92% of the world's 500 largest companies recently reported using derivatives suggests that corporate managers believe financial risk management can increase shareholder value. Surveys of finance academics indicate that they too believe that corporate risk management is, on the whole, a valueadding activity. This article provides an overview of almost 30 years of broadbased, stock-market-oriented academic studies that address one or more of the following questions: ,Are interest rate, exchange rate, and commodity price risks reflected in stock price movements? ,Is volatility in corporate earnings and cash flows related in a systematic way to corporate market values? ,Is the corporate use of derivatives associated with reduced risk and higher market values? The answer to the first question, at least in the case of financial institutions and interest rate risk, is a definite yes; all studies with this focus find that the stock returns of financial firms are clearly sensitive to interest rate changes. The stock returns of industrial companies exhibit no pronounced interest rate exposure (at least as a group), but industrial firms with significant cross-border revenues and costs show considerable sensitivity to exchange rates (although such sensitivity actually appears to be reduced by the size and geographical diversity of the largest multinationals). What's more, the corporate use of derivatives to hedge interest rate and currency exposures appears to be associated with lower sensitivity of stock returns to interest rate and FX changes. But does the resulting reduction in price sensitivity affect value,and, if so, how? Consistent with a widely cited theory that risk management increases value by limiting the corporate "underinvestment problem," a number of studies show a correlation between lower cash flow volatility and higher corporate investment and market values. The article also cites a small but growing group of studies that show a strong positive association between derivatives use and stock price performance (typically measured using price-to-book ratios). But perhaps the nearest the research comes to establishing causality are two studies,one of companies that hedge FX exposures and another of airlines' hedging of fuel costs,that show that, in industries where hedging with derivatives is common, companies that hedge outperform companies that don't. [source]

THE WESTERN AUSTRALIAN POWER DILEMMA,

AUSTRALIAN ECONOMIC PAPERS, Issue 4 2009
PAUL SIMSHAUSER
From 1984 gas-fired power generation had been gradually increasing its share of the electricity market in Western Australia (WA) starting at 1 per cent and rising to about 50 per cent by 2008. Had it continued on this trajectory, the WA power system would have made great advances in terms of cost and environmental efficiencies given the looming commencement of the Carbon Pollution Reduction Scheme in Australia from 2011. However, more recently the cost of natural gas has increased from $3/GJ to $7/GJ following the sudden collapse of the East Spar gas field in the North West Shelf. In this article, we analyse the impact of the gas price increase and demonstrate that despite being the most environmentally efficient conventional technology, natural gas combined cycle plant has been squeezed out of the market which in turn will increase forward electricity price risks to WA consumers through greater exposure to CO2 pricing in the long run. [source]