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2009 | OriginalPaper | Buchkapitel

1. Introduction

verfasst von : Dr. Andreas Röthig

Erschienen in: Microeconomic Risk Management and Macroeconomic Stability

Verlag: Springer Berlin Heidelberg

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Abstract

In the traditional hedging literature, the two markets in which hedgers trade are spot and futures markets. The trader’s position in the spot market is generally considered as given. According to Johnson (1960), hedging can be meaningfully defined only if the spot market is regarded as the trader’s primary market. The futures market is used solely to counterbalance an existing position in the spot market. Speculators, in contrast, do not have a commitment in the spot market. They take on risk in futures markets in order to profit from expected price changes. The hedger synchronizes his trading activities in spot and futures markets in order to reduce spot risk. In the literature this approach to hedging is labeled risk reduction concept. Risk reduction will be achieved if spot and futures prices move more or less in parallel. If prices are perfectly correlated, risk is abolished, since losses in one market are perfectly offset by profits in the other market. However, as Hardy and Lyon (1923) point out, any divergence from perfect correlation results in an imperfect hedge. The less futures and spot prices move in parallel, the more imperfect the protection offered by hedging is. According to Kobold (1986), spot and futures prices generally do not move exactly in parallel. In fact, futures and spot markets are separate markets. Even speaking of a single spot market may be misleading, since, in general, most commodities are traded in many different places. The futures market, on the contrary, is generally highly centralized. Telser (1986) points out that each futures contract is a perfect substitute for another futures contract with the same maturity. If spot and futures prices do not move exactly in parallel, hedges end up with a profit or loss. Hence, if the motive for hedging is the elimination of spot risk, spot and futures prices, not moving in parallel, prevent complete risk reduction and are therefore unfavorable.

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Nächstes Kapitel Backwardation and Optimal Hedging Demand in an Expected Utility Hedging Model
Fußnoten
1
For more information see e.g., Johnson (1957), Rutledge (1972) and Hirshleifer (1975, 1977).
 
2
According to Allen and Gale (1994, p. 215), “(...) the MMT (i.e., Modigliani-Miller theorem) is a statement about the effect of the firm’s choices.” The theorem basically says that the market value of the firm is not affected by the firm’s choice of its financial structure, i.e., by its debt-equity ratio. A list of the assumptions on which the Modigliani-Miller theorem is build can be found in Copeland, Weston, and Shastri (2005, p. 559). See also Jensen and Meckling (1976), MacMinn (1987) and Bauer and Ryser (2004).
 
3
Fatemi and Luft (2002, p. 31–32).
 
4
See also Duffie and Singleton (2003).
 
5
For a review of the literature see Froot, Scharfstein, and Stein (1993), Nance, Smith, and Smithson (1993), Mian (1996), Géczy, Minton, and Schrand (1997), Schrand and Unal (1998), Tufano (1998), Beatty (1999), Guay (1999), Brown and Toft (2002), Fatemi and Luft (2002), Albuquerque (2003), Guay and Kothari (2003), Pennings and Garcia (2004) and Lin and Smith (2005).
 
6
Graham and Rogers (2002) provide empirical findings on the impact of taxes on hedging.
 
7
Empirical findings concerning the underinvestment problem and hedging are provided by Gay and Nam (1998). See also Haushalter, Klasa, and Maxwell (2007).
 
8
For more information on capital market imperfections, liquidity, and hedging see Myers and Majluf (1984), Stulz (1990), Mian (1996) and Mello and Parsons (2000).
 
9
Interestingly, Modigliani and Miller (1958, p. 296) themselves advocate the relaxation of their theorem’s restrictive assumptions: “These and other drastic simplifications have been necessary in order to come to grips with the problem at all. Having served their purpose they can now be relaxed in the direction of greater realism and relevance, a task in which we hope others interested in this area will wish to share.”
 
10
See e.g., Smith and Stulz (1985) and Froot et al. (1993). Since the full hedging of the spot exposure eliminates spot risk, the full hedge can be considered a perfect hedge. Hence, the terms full hedging and perfect hedging can be used interchangeably if the full hedging strategy perfectly eliminates spot risk.
 
11
For more information on these two approaches to hedging see e.g., Peck (1975), Holthausen (1979), Levy and Markowitz (1979), Feder, Just, and Schmitz (1980), Kahl (1983), Benninga, Eldor, and Zilcha (1985), Zilcha and Broll (1992), Briys and Schlesinger (1993), Lence (1995a, 1995b), Broll and Eckwert (1996, 2000), Vukina et al. (1996), Collins (1997), Adam-Müller (2000), Haigh and Holt (2000) and Broll, Chow, and Wong (2001).
 
12
For more information on the CFTC’s COT report, see Ederington and Lee (2002), Chatrath, Song, and Adrangi (2003), Sanders, Boris, and Manfredo (2004) and Röthig and Chiarella (2007).
 
13
See also Levich, Hayt, and Ripston (1999).
 
14
See e.g., Nance, Smith, and Smithson (1993), Allayannis and Weston (2001) and Allayannis, Ihrig, and Weston (2001).
 
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Metadaten
Titel
Introduction
verfasst von
Dr. Andreas Röthig
Copyright-Jahr
2009
Verlag
Springer Berlin Heidelberg
Buch
Microeconomic Risk Management and Macroeconomic Stability

Print ISBN: 978-3-642-01564-9

Electronic ISBN: 978-3-642-01565-6

Copyright-Jahr: 2009

DOI
https://doi.org/10.1007/978-3-642-01565-6_1