Advances in Economics, Management and Political Sciences
- The Open Access Proceedings Series for Conferences
Series Vol. 81 , 06 June 2024
* Author to whom correspondence should be addressed.
This article examines three different risk management methods: asset hedging by shorting stocks, cash flow hedging using forward contracts, and futures contracts. The article explains each method's rationale, application, advantages, and disadvantages. By presenting and explaining these methods, this study aims to help readers gain insights into their effectiveness in managing risk in different types of transactions. The content of the article supports the readers to have a better understanding and gives some strategies for risk management, and provides guidance for decision-makers to mitigate potential risks in their financial operations. Asset hedging by shorting stocks involves selling borrowed stocks in anticipation of a decline in their price, thereby offsetting the potential loss of a declining asset. This strategy allows an investor to profit from a decline in stock prices. Cash flow hedging through forward contracts involves entering into an agreement to buy or sell an asset at a pre-determined future price, thereby reducing the risk of adverse price movements and ensuring a stable cash flow. On the other hand, futures contracts are standardized agreements to buy or sell an asset at a future date, are traded on public markets, provide legal protection for both parties through financial intermediaries, and allow investors to lock in prices. While these risk management methods have obvious advantages, such as potential gains to offset the risk of asset depreciation during market downturns, protection against adverse price movements, and price stabilization, they also have inherent risks and limitations that need to be carefully considered.
Risk management, Asset hedging, stock
1. Bunea-Bontas, C. A. (2009). Basic principles of hedge accounting. Economy Transdisiplinarity Cognition.
2. Smistad, R. E., & Pustylnick, I. (2012). Hedging, hedge accounting and speculation: Evidence from Canadian oil and gas companies. Global journal of business research, 6(3), 49-62.
3. Mello, A. S., & Parsons, J. E. (2000). Hedging and liquidity. The Review of Financial Studies, 13(1), 127-153.
4. Bartram, S. M. (2008). What lies beneath: Foreign exchange rate exposure, hedging and cash flows. Journal of Banking & Finance, 32(8), 1508-1521.
5. Van Mieghem, J. A. (2011). Risk management and operational hedging: an overview. The Handbook of Integrated Risk Management in Global Supply Chains, 13-49.
6. Disatnik, D., Duchin, R., & Schmidt, B. (2014). Cash flow hedging and liquidity choices. Review of Finance, 18(2), 715-748.
7. Islam, M., & Chakraborti, J. (2015). Futures and forward contract as a route of hedging the risk. Risk Governance and Control: Financial Markets & Institutions, 5, 68-79.
8. Tashjian, E. (1995). Optimal futures contract design. The Quarterly Review of Economics and Finance, 35(2), 153-162.
9. Ku, Y. H. H., Chen, H. C., & Chen, K. H. (2007). On the application of the dynamic conditional correlation model in estimating optimal time-varying hedge ratios. Applied Economics Letters, 14(7), 503-509.
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Authors who publish this series agree to the following terms:
1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this series.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial publication in this series.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See Open Access Instruction).