Essays on Corporate Hedging, Firm Risk and Firm Value Assignment

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The paper "Corporate Hedging, Firm Risk and Firm Value" is a great example of an assignment on management. Businesses by virtue of their dynamic nature are prone to risks. Risk can originate from anywhere. The factors can either be internal and operations based or can be it can be external or environmental driven. Though there are instruments available at the helm of a financial manager to gauge and mitigate the risk involved, it is sophisticated enough to use it judiciously. A derivative is one such financial instrument that derives its value from some underlying asset.

It is one of the most popular financial instruments to hedge financial risk. Business can never run on mere whims and fancies of a financial manager. Thus one needs to estimate in advance the outcomes and risks involved with the business. The process of taking preemptive steps to curb the ill effects of risks is indeed called hedging. There can be very many ways to do that. But as a matter of fact, it is never possible to completely avoid or curb any risk. Risk by definition is a possibility and that can never be estimated with surety.

It is often argued among various research papers that there exists a relationship between the derivative used for hedging and the value of the firm. There are arguments and counter-arguments in this concern. Moreover, there is also a debatable relationship between the derivatives used for hedging and the market risk exposure of any firm. This assignment endeavors to logically explore such standpoints and come up with a reasonable conclusion in this concern. Moreover, it will also briefly touch the basic fundamentals involved with derivative and hedging as used and adopted by different organizations. Introduction: Why’ s and how’ s Derivatives being at the realm of advanced technical finance is considered a mystery term.

Technically speaking, the concept of derivatives, hedging, firm valuation, and risk exposure are the terms that are not in the common league of investors and thus are considered complex. The following explanations will try to ease off any such complexity. Derivatives A derivative can be defined as the financial instrument having a certain value that is derived from or stems from a principle underlying asset or set of assets.

A derivative's value is derived off a spot price time-series of an asset but as far as the ownership of a derivative is concerned, it doesn't warrant ownership of the underlying asset or set of assets.

References

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2. Bali, T.G., Hume, S.R., Martell, T.F. (2007). Does hedging with derivatives reduce the market risk exposure? Journal of Futures Markets, 27, 1053–1083

3. Hentschel, L., & Kothari S.P. (2001). Are corporations reducing or taking risks with derivatives? Journal of Financial and Quantitative Analysis, 36, 93–118

4. Hull, J., 2007. Risk Management and Financial Institutions, 1st Edition, Pearson

5. Nance, D.R., Smith, C.W., & Smithson, C.W. (1993). On the determinants of corporate hedging. Journal of Finance, 48, 267–284

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