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... Over a period of several years, instead of hedging the company’s price exposure, the head of the trading department engaged in speculation. ... However, by the time the company was alerted to these acts of speculation in June 1996, the accumulated loss had grown to USD 1. ...
The purpose of this paper was to analyze already published research and studies that examined whether corporations’ use of derivatives in their risk management programs aimed at increasing return volatility (speculation) or decreasing the one (hedging). ... Hedging or speculation? ... , Joshi, Yash (1996), who studied nearly 200 large companies, casted serious doubt on the economic benefits of FX hedging programs. In the study, they estimated the potential benefits of FX hedging for a sample of large firms. ... Cashflows from a hypothetical FX hedging program were estimated and their volatility was compared with that of the firms actual cash flows. If hedging produced large reductions in volatility, this would suggest high potential benefits; small reductions would indicate low potential benefits. ... Only a very small percentage of firms, then, appeared to benefit from the hypothetical hedging program. They concluded that FX hedging did not and could not reduce cashflow volatility in real-life. ... Ofek (1998) examined whether firms used currency derivatives for hedging or for speculative purposes.
Approximate Word count = 1047
Approximate Pages = 4.2
(250 words per page double spaced)
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