Hedging Business Risks and Liquidity Risks

By

ACKNOWLEDGEMENT

I would like to thank my supervisor for supporting me throughout my project and giving his valuable suggestions. Finally thanks to all my friends and family for their utmost support and inspiration.

DECLARATION

I, (Your name), would like to declare that all contents included in this dissertation stand for my individual work without any aid, & this dissertation has not been submitted for any examination at academic as well as professional level previously. It also represents my own views & not essentially the ones associated with university.

Signed __________________ Date _________________

ABSTRACT

The research study has focused different kinds of risks that the hedging can reduce to the greater extent. There have been analyzed different kinds of risks like the liquidity risks, business risks and the financial risks. However, these risks are further divided into other risks. The main risks that the corporations are exposed to in the financial markets are the interest rate risk, foreign exchange risk, currency risks, weather risks and the real estate risks. These risks make the profits of the companies highly volatile due to which the firms have to use different strategies for reducing the risk. The hedging is one of the most common tools that are used by the companies in order to reduce the volatility of different factors that affect their profits. There have been developed different derivatives that help the companies in minimizing their risk. There are interest rate derivatives, foreign exchange derivatives, currency derivatives, liquidity derivatives and others. These derivatives are in use since three decades now and have been providing protection to the individual investors and the corporations to reduce their risks. There is a whole industry of the derivatives market that is used by the investors and corporations. The two most common macroeconomic variables that gave rise to the derivatives market are the interest rate derivatives and the foreign exchange derivatives. As the companies are usually exposed to these risks in their daily operations, they have given rise to the whole market. There have also been evolved other derivatives that has significantly reduced the liquidity risks among the companies. The research study has discussed these derivatives in detail by analyzing different factors.

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the research study1

Aims and Objectives of the research study3

Problem Statement4

Significance of the research study4

Rationale of the research study7

Research Questions9

CHAPTER 2: LITERATURE REVIEW10

Theoretical Framework10

Process of Hedging10

Hedging is a business management system11

Hedging as a risk management tool11

Hedging as a tool of financial management11

How to evaluate the effectiveness of hedging12

Example 112

What part of the volatility is recognized in equity?14

Example of option hedging strategy call (Call)15

Commodity hedging16

Examples of hedging used in practice17

The practice of hedging on the example of agricultural producer17

Operations18

Liquidity Risk19

Business Risk19

Hedge funds20

Hedging Liquidity Risk21

Risk Generating Strategies21

Problems of Hedging and their Solutions22

Solution23

Foreign Investment Risk and Political Coverage24

Political Risk Insurance27

Trade-related insurance27

Related Research29

Hedging Model31

Summary of Institutional Ownership32

Empirical Methods32

Measurement of Liquidity Risk33

An Event Study of Liquidity Crisis33

CHAPTER 3: METHODOLOGY35

Introduction35

Research Approach36

Research design36

Literature Review38

Analysis, Conclusion and Recommendation39

Social Constructivist Theory40

Phenomenology42

Rationale for a Qualitative Study44

Rationale for a Phenomenological Study45

Research Question47

Methodology48

Role ...