Browsing by Subject "Hedging (Finance)"
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Item Hedging recurring interest rate exposure: an evaluation of alternative strategies with Eurodollar futures contracts(Texas Tech University, 1999-05) Haque, Mohammad M.One unique type of exposure that many financial institutions and corporate treasuries encounter is repetitive or recurring interest rate or price exposure. When one is faced with repetitive or recurring interest rate exposure, a question arises as to which expiration month futures contracts should be employed to hedge against this type of exposure. With regard to this issue at least two alternative hedging strategies are available; a stack (rollover) hedge and a strip hedge (Kawaller, 1991). The purpose of this dissertation is twofold. First, to fully layout the conceptual issues in order to examine how different factors (i.e., basis, risk premium, calendar spread, transaction costs etc.) related to liquidity and pricing considerations influence the risk/return characteristics of the alternative (no-hedge, strip and stack) hedging strategies. Second, to investigate empirically the effectiveness of these strategies in managing repetitive interest rate exposure with Eurodollar futures contracts. The empirical investigation examines the historical performance of the three alternative Hedging strategies over the period December 1, 1983-Febmary 28, 1999. The alternative strategies are evaluated against four evaluation criteria that are based on different hedging objectives (risk minimization, target rate realization, return maximization and risk-return optimization). In addition, under each Hedging objective we examine the factors that contribute to the differences in the performance of the Hedging strategies. The ex-post effectiveness of alternative hedging strategies is tested by simulating quarterly cost of a representative bank's loanable funds used to finance a series of hypothesized fixed-rate loans. Three alternative hedge periods/loan terms are considered (two-quarter, four-quarter period and six-quarter). Under each hedge period, both overlapping and non-overlapping samples are examined. Review of the literature on Hedging theories clearly indicates that there is not a single objective that motivates all hedgers. In order to compare the performances of alternative strategies, specific criterion consistent with specific Hedging objective needs to be utilized. Our empirical evidence provides guidance for a potential short or long Hedger to select the strategy that suits his or her risk-return preferences.Item Marketing strategies available to cattle producers: an analysis and comparison of hedging and options(Texas Tech University, 1987-12) Mills, Foy DanMajor changes in the cattle feeding industry have substantially increased price risk faced by livestock producers. The purpose of this study was to assess the usefulness of options on live cattle futures contracts in reducing price risk as compared to hedged and unhedged strategies. Appropriate data were collected and analyzed under a single-valued risk-reward utility function using mean-variance analysis and a quadratic risk-reward utility function using portfolio analysis for five- and six-month feeding regimes. Returns to working capital were calculated resulting in negative rates of return for each strategy. Investigation of why cattle feeders would continue to produce when average rates of return were negative led to the conclusion that many producers consider only feeder and feed costs. Rates of return above feeder and feed cost were then determined for each strategy. Writing "covered" calls dominated all marketing strategies. Inspection of these results showed a distinct biannual cyclical pattern for lower/higher monthly returns. The rates of return were re-estimated for divided placement periods of Spring/Summer (S/S) and Fall/Winter (F/W). Writing calls and buying puts had the highest rate of return for S/S and F/W placement, respectively. Quadratic risk-reward utility functions were estimated using portfolio analysis. Writing "covered" calls also dominated continuous and S/S placements when addressing risk and reward simultaneously; a riskless hedge using puts provided the same results for F/W placement. Rates of return were also estimated into the future using different price expectation models. The strategies to use were consistently shown to be specific to time period and the associated price trend. The inclusion of put options in portfolio analysis caused the efficient E-M frontier to flatten out and shift upward enlarging the opportunity set. When writing "covered" calls in a sideways/downward trending market, no E-M surface was traced out.Item Short-term hedging strategies for the live hog market(Texas Tech University, 1978-12) Spencer, TommyNot availableItem Spreads in financial futures markets: treasury bill and Eurodollar futures(Texas Tech University, 1996-08) Stewart, Jonathan DavidFinancial futures are used by market participants for both hedging and speculative reasons. Financial futures spreads provide investors with the opportunity to profit by predicting relative price moves between two futures contracts. This dissertation is a theoretical and empirical examination of the spread between Treasury bill and Eurodollar futures, known as the TED spread. Theoretical differences between Treasury bill and Eurodollar futures contracts are considered to determine factors which should affect the magnitude of the TED spread. Theory predicts that the magnitude of the TED spread should be influenced by default risk on Eurodollar CDs, the difference in yield quotation conventions between the two contracts, tax effects, reserve requirements, and the fact that Treasury bill futures settle to price while Eurodollar futures settle to yield. Empirically, the impact of reserve requirements, the differential yield conventions, and the fact that Treasury bill futures settle to price while Eurodollar futures settle to yield, are tested to determine their impact upon the TED spread. The impact of reserve requirements is tested by comparing the competing hypotheses of Fabozzi and Thurston (1986) with that of Fama (1985) and James (1987). The results are consistent with Fama and James finding that Eurodollar CD reserve requirement changes do not have a significant impact upon the magnitude of the TED spread. Treasury bill futures prices are quoted on a discount yield basis, while Eurodollar futures prices are quoted on an add-on yield basis. Theoretically this difference should cause the magnitude of the TED spread to increase when interest rates are high and decrease when rates are low. Wlien considered in a long-run equilibrium framework, we find no evidence that the differential yield conventions have a significant impact upon the magnitude of the TED spread. Sundaresan (1991) predicts that the differential settlement procedures in the Treasury bill and Eurodollar futures market should cause Eurodollar futures prices to be higher holding other factors constant. We adapt this theory so as to test it within the context of the TED spread. The results indicate that differential settlement conventions have a significant impact upon the magnitude of the TED spread, however, this effect is not as pronounced as predicted by the theory of Sundaresan.Item Weather derivatives : corporate hedging and valuation(2003-08) Yang, Chuanhou; Brockett, PatrickWeather derivatives constitute a rather recent kind of financial products developed to hedge weather risks. The development of weather derivatives represents one of the recent trends toward the convergence of insurance and finance. This dissertation addresses the valuation issue of weather derivatives in the incomplete market, hedging effectiveness of standardized weather derivatives, as well as weather hedging with the consideration of basis risk and credit risk. Basis risk is an important concern in hedging with standardized contracts. In Chapter 2, we analyze the basis risk of Heating Degree Days (HDD)/Cooling Degree Days (CDD)-indexed weather derivatives in the U.S. electricity market. Two types of standardized weather indices are used. Hedging effectiveness is compared between seasons, between different underlying indices, and among the months. Our findings extend the extant literature on weather hedging and provide important implications to all parties engaged in the weather-derivative market. Credit risk has attracted much attention in the weather risk market since the bankruptcy of Enron. In Chapter 3, we analyze risk-sharing efficiency effects of basis hedging, the joint use of the standardized exchange-traded weather derivatives, and some weather derivatives (basis weather derivatives) for hedging the basis risk, by considering the credit risk of OTC contracts. Simulations are conducted to illustrate the determinants of the hedging ratios and hedging effectiveness. Empirical analyses of the basis hedging effectiveness for some U. S. cities are provided. Weather derivatives are a classic, incomplete market model. Actuarial and complete financial valuation models are not appropriate to price weather derivatives. In Chapter 4, we propose and implement an indifference-valuation approach to price weather derivatives in the incomplete market. The fundamental idea for this approach stems from the basic economic principle of certainty equivalent, but is modified and extended to accommodate partial hedging in the financial market. In the mean-variance framework, we adopt the indifference approach to price a single weather derivative on its stand-alone performance, as well as to price the weather derivatives in the context of the marginal changes they cause to the weather derivatives portfolio.