Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Not so ‘evil’: Finance study makes case for hedging

03.02.2014
The overuse of financial contracts known as derivatives – which were designed to help companies hedge against risk – was widely blamed for triggering the economic crisis of 2008.

None other than Warren Buffet has attacked derivatives as “time bombs – both for the parties that deal in them and the economic system.”

But now, for the first time, researchers have found that hedging can increase firm value. In a pioneering study published in the Journal of Finance, Michigan State University’s Hayong Yun and Stanford University’s Francisco Pérez-Gonzálezshow that electric and gas utilities that used derivatives to hedge against unpredictable weather experienced a “positive and significant effect” on the value of their firms.

“Many people have a perception that derivatives are evil, that they helped destroy the economy,” said Yun, MSU assistant professor of finance.

“And while there is some truth to the argument that derivatives were overused, our research provides the first fundamental evidence that hedging with derivatives can improve company value.” Derivatives are widely used in the corporate world – from a CEO’s stock options to corn futures, in which a cereal maker, for example, purchases 2,500 corn bushels from a farmer at current prices for delivery in three months. Mortgage-backed securities, another type of derivative, were blamed for creating the housing bubble and subsequent recession.

Yun said he’s not advocating that derivatives be completely deregulated. But at the same time, his research suggests derivatives – when used wisely – have an upside and should not be discounted as a potential instrument for company growth. In the study, the researchers examined the value of publicly traded electric and gas utilities in the United States both before and after a weather derivatives market opened in the late 1990s.

The market allowed the utilities to sell weather futures to investors. Before the market opened, utility companies that were susceptible to unpredictable weather – such as those in the Midwest – were valued 3 percent to 4 percent lower, on average, than utilities where the weather was more stable, such as in southern California and Texas. After the weather derivative market opened, that difference disappeared. Investors no longer cared the utility was located in an unstable-weather locale.

In essence, the use of derivatives leveled the playing field, and utilities in the Midwest and other areas with unstable weather had equal value to those in stable-weather areas, as well as increased leverage and investments. The study was recently awarded the 2013 Brattle Group First Prize in Corporate Finance, given annually to the best corporate finance paper published in the highly selective Journal of Finance.

Andy Henion | EurekAlert!
Further information:
http://www.msu.edu
http://msutoday.msu.edu/news/2014/not-so-evil-finance-study-makes-case-for-hedging/

Further reports about: Derivatives Finance Finance study company value economic crisis

More articles from Business and Finance:

nachricht Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management

nachricht Paper or plastic?
08.07.2016 | University of Toronto

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: New welding process joins dissimilar sheets better

Friction stir welding is a still-young and thus often unfamiliar pressure welding process for joining flat components and semi-finished components made of light metals.
Scientists at the University of Stuttgart have now developed two new process variants that will considerably expand the areas of application for friction stir welding.
Technologie-Lizenz-Büro (TLB) GmbH supports the University of Stuttgart in patenting and marketing its innovations.

Friction stir welding is a still-young and thus often unfamiliar pressure welding process for joining flat components and semi-finished components made of...

Im Focus: First quantum photonic circuit with electrically driven light source

Optical quantum computers can revolutionize computer technology. A team of researchers led by scientists from Münster University and KIT now succeeded in putting a quantum optical experimental set-up onto a chip. In doing so, they have met one of the requirements for making it possible to use photonic circuits for optical quantum computers.

Optical quantum computers are what people are pinning their hopes on for tomorrow’s computer technology – whether for tap-proof data encryption, ultrafast...

Im Focus: OLED microdisplays in data glasses for improved human-machine interaction

The Fraunhofer Institute for Organic Electronics, Electron Beam and Plasma Technology FEP has been developing various applications for OLED microdisplays based on organic semiconductors. By integrating the capabilities of an image sensor directly into the microdisplay, eye movements can be recorded by the smart glasses and utilized for guidance and control functions, as one example. The new design will be debuted at Augmented World Expo Europe (AWE) in Berlin at Booth B25, October 18th – 19th.

“Augmented-reality” and “wearables” have become terms we encounter almost daily. Both can make daily life a little simpler and provide valuable assistance for...

Im Focus: Artificial Intelligence Helps in the Discovery of New Materials

With the help of artificial intelligence, chemists from the University of Basel in Switzerland have computed the characteristics of about two million crystals made up of four chemical elements. The researchers were able to identify 90 previously unknown thermodynamically stable crystals that can be regarded as new materials. They report on their findings in the scientific journal Physical Review Letters.

Elpasolite is a glassy, transparent, shiny and soft mineral with a cubic crystal structure. First discovered in El Paso County (Colorado, USA), it can also be...

Im Focus: Complex hardmetal tools out of the 3D printer

For the first time, Fraunhofer IKTS shows additively manufactured hardmetal tools at WorldPM 2016 in Hamburg. Mechanical, chemical as well as a high heat resistance and extreme hardness are required from tools that are used in mechanical and automotive engineering or in plastics and building materials industry. Researchers at the Fraunhofer Institute for Ceramic Technologies and Systems IKTS in Dresden managed the production of complex hardmetal tools via 3D printing in a quality that are in no way inferior to conventionally produced high-performance tools.

Fraunhofer IKTS counts decades of proven expertise in the development of hardmetals. To date, reliable cutting, drilling, pressing and stamping tools made of...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

HLF: From an experiment to an establishment

29.09.2016 | Event News

European Health Forum Gastein 2016 kicks off today

28.09.2016 | Event News

Laser use for neurosurgery and biofabrication - LaserForum 2016 focuses on medical technology

27.09.2016 | Event News

 
Latest News

New Multiferroic Materials from Building Blocks

29.09.2016 | Materials Sciences

Silicon Fluorescent Material Developed Enabling Observations under a Bright “Biological Optical Window”

29.09.2016 | Materials Sciences

X-shape Bio-inspired Structures

29.09.2016 | Interdisciplinary Research

VideoLinks
B2B-VideoLinks
More VideoLinks >>>