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Financial Hedging
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Editors: Patrick N. Catlere
Book Description:
Financial hedging refers to taking out investments in order to reduce or cancel the risk in another investment. Its purpose is to minimize unwanted business risk while still allowing the business to profit from investment activity.

The problem of credit risk is one of the most important problems in finance. It consists of computing the probability of a firm defaulting on a debt. The time evolution of rating for credit risk models can be studied by means of Markov transition models. This book looks at the homogeneous and non-homogeneous semi-Markov backward credit risk migration models.

A joint optimization model for a firm's hedging and leverage decisions, to help establish an integrated framework for value creation, is also examined. Rather than artificially separating the two interrelated parts of the firm's financial policy, both corporate decision variables are treated as endogenous. Furthermore, the cross-sectional variation in indirect bankruptcy costs is discussed, possibly resulting from a deterioration of relationships with customers, suppliers or other stakeholders prior to the legal act of bankruptcy.

The effect of probability weighting on hedging decisions is explored in this book. Observed hedge ratios in a storage context are close to zero in many situations and often smaller than the standard minimum-variance hedge zero. Thus, the importance of probability weighting in decision making and how it can cause dramatic changes in behavior is looked at.
This book also re-examines hedging performance of the minimum variance hedge ratios (MVHR) estimated using both the OLS and the GARCH-type models with S&P 500 index futures contracts. In particular, the out-of-sample comparison of hedging performance of the MVHRs under different market volatility regimes are looked at.

In addition, the analysis for parametric and non-parametric Markov processes are discussed and the construction of the transition matrix in these two different cases. Several possible strategies where the investors recalibrate their portfolios at a fixed temporal horizon are proposed. The authors also show how the Markov assumption can be used to forecast the portfolio returns and some simple empirical comparisons between Markovian strategies and classic reward-risk ones.

Finally, articles in this book contribute to the literature on futures hedging in commodity futures markets by using wavelet transform analysis to define an explicit and tractable concept of time horizon. Differences in hedge ratios are discussed both across commodities and, for each commodity, over all time horizons of decision-making.

Please click on a chapter below to purchase separately

Chapter 1 - HOMOGENEOUS AND NON-HOMOGENEOUS SEMI-MARKOV BACKWARD CREDIT RISK MIGRATION MODELS
Authors / Editors: Guglielmo D’Amico, Giuseppe Di Biase, Jacques Janssen and Raimondo Manca

Chapter 2 - TOWARDS AN INTEGRATED THEORY OF CORPORATE HEDGING AND CAPITAL STRUCTURE DECISIONS
Authors / Editors: Lutz Hahnenstein and Klaus Röder

Chapter 3 - PROBABILITY WEIGHTING IN FUTURES HEDGING
Authors / Editors: Fabio Mattos

Chapter 4 - HEDGING EFFECTIVENESS WITH S&P 500 INDEX FUTURES UNDER DIFFERENT VOLATILITY REGIMES
Authors / Editors: Weijun Xu and Li Yang

Chapter 5 - AMERICAN AND EUROPEAN PORTFOLIO SELECTION STRATEGIES: THE MARKOVIAN APPROACH
Authors / Editors: Enrico Angelelli and Sergio Ortobelli
***Open Access Chapter. Free Download Available***

Chapter 6 - HEDGING, LIQUIDITY, AND THE MULTINATIONAL FIRM UNDER EXCHANGE RATE UNCERTAINTY
Authors / Editors: Kit Pong Wong

Chapter 8 - OPTION PRICING AND HEDGING IN THE PRESENCE OF TRANSACTION COSTS AND NONLINEAR PARTIAL DIFFERENTIAL EQUATIONS
Authors / Editors: Valeri Zakamouline

Chapter 9 - TIME HORIZON-SPECIFIC HEDGING IN COMMODITY MARKETS
Authors / Editors: Gabriel J. Power and Calum G. Turvey

Chapter 10 - SIMULTANEOUS VERSUS SEPARATE HEDGING STRATEGIES
Authors / Editors: Donald Lien and Mei Zhang

   Binding: Hardcover
   Pub. Date: 2009 3rd Quarter
   Pages: 271 pp.
   ISBN: 978-1-60692-665-9
   Status: AV
  
Status Code Description
AN Announcing
FM Formatting
PP Page Proofs
FP Final Production
EP Editorial Production
PR At Prepress
AP At Press
AV Available
  
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Financial Hedging