Does the Use of Foreign Currency Derivatives Affect Colombian Firms’ Market Value?

Classic financial theory relies on the absolute perfection of capital markets, which results in one of the milestones of theoretical corporate finance: the firm’s value is invariant to the choice of capital structure. As an extension to the aforementioned proposition by Modigliani and Miller (1958), corporate risk management is also futile. Nevertheless, it is clear that capital markets do not work with absolute perfection. There exist frictions which make risk management decisions essential for the firm’s value. Moreover, derivatives’ market vast importance is a good proxy of the relevance of hedging decisions for corporate finance. There is a remarkable volume of literature which tests the effects of risk management and hedging decisions for the value of the firm, mainly for the US corporate market. However, there is little effort on this subject for markets which work even farther from absolute perfection. This document undertakes such task for the Colombian market. Focused on non-financial firms and the local’s most liquid derivatives market, we find that for a panel of eight large Colombian corporations, the growth rate of Tobin´s Q depends significantly on firm´s size and hedging. Our results suggests that, after controlling for relevant financial variables such as firm´s profitability and leverage, and other variables such as firm´s age, an increase in hedging leads to a higher growth in the firm´s value.Modigliani-Miller, risk management, hedging, firm value, emerging market, Tobin´s Q. Classification JEL: G32, G30, L25.

Using financial futures in trading and risk management

The authors explain the features of an array of futures contracts and their basic pricing relationships and describe a few applications to show how investors and risk managers can use these contracts. Futures - and derivatives generally - allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. Futures are not a financing or investment vehicle per se, but a tool for transferring price risks associated with fluctuations in asset values. Some may use them to spread risk, others to take on risk. Financial futures (along with options) are best viewed as building blocks. Futures have facilitated the modern trend of separating conventional financial products into their basic components. They allow not only the reduction of transformation of investment risk but also the understanding and measurement of risk. The market for derivatives has grown enormously over the past decade. The value of exchange-traded eurodollar derivatives (futures and options) is equal to roughly 13 times the value of the underlying market. The volume of trading in financial futures now dwarfs the volume in traditional agricultural contracts. As emerging markets develop, given their inherently risky nature, expect financial futures to play a prominent role in risk management.Payment Systems&Infrastructure,Economic Theory&Research,International Terrorism&Counterterrorism,Banks&Banking Reform,Securities Markets Policy&Regulation,Commodities,Banks&Banking Reform,International Terrorism&Counterterrorism,Non Bank Financial Institutions,Economic Theory&Research

Dealing with commodity price uncertainty

Liberalization in commodity markets has brought profound changes in the way price risks are allocated and managed in commodity subsectors. Price risks are increasingly allocated to private traders and farmers rather than absorbed by the government. The success of market reform depends on the ability of the emerging private sector to make full use of the available range of modern commodity marketing, price risk management and financing instruments. Because farmers do not generally have access to these instruments, intermediaries must be developed. Larger private traders and banks are in the best position to become these intermediaries. Preconditions needed for accessing modern commodity marketing, price risk management, and financing instruments are: a) creating an appropriate legal, regulatory, and institutional framework; b) reducing government intervention; c) providing training and raising awareness; and d) improving creditworthiness and reducing performance risk. The use of commodity derivative instruments to hedge commodity price risk is not new. The private sectors in many Asian and Latin American countries have been using commodity futures and options for some time. More recently, commodity derivative instruments are being used increasingly in several African countries and many economies in transition. And several developing and transition economies have sought to establish commodity derivative exchanges.Markets and Market Access,Payment Systems&Infrastructure,Environmental Economics&Policies,Commodities,International Terrorism&Counterterrorism,Access to Markets,Crops&Crop Management Systems,Commodities,Environmental Economics&Policies,Markets and Market Access

A Survey of Foreign Currency Risk Awareness and Management Practices in Tanzania

Since mid-1970's fixed foreign currency exchange regimes have been disbanded in many countries. With the support of the Bretton-Woods institutions and other leading financial institutions there has been since the 80's and much more recently disbanding of fixed foreign exchange regimes in Africa, Asia and in Eastern Europe. Countries with diverse economic and financial structures have adopted market - determined foreign exchange rate systems

The economic benefits and risks of derivative securities

Certain events have raised concern about the risks associated with derivatives trading--witness Orange County, California or Procter & Gamble, both of which lost large sums of money using derivatives. However, the popular discussion often loses track of the benefits derivatives hold for firms, investors, and the economy as a whole. Have derivatives received a bum rap? Keith Sill admits that derivatives have risks, especially to the uninitiated, but they also have a great deal of value for the economy as wellDerivative securities