Archive for September, 2014

However, controlling for this country effect, the general pattern of usage across industry and size is very comparable, suggesting that the general tendency to use derivatives is driven by economic issues such as operational activities and firm characteristics. While firms in both countries overwhelmingly indicate that they use derivatives mostly for risk management, differences appear in the primary goal of using derivatives, with German firms focusing more on managing accounting results whereas US firms focused more on managing cash flows

German firms are more likely to incorporate their own market view on price movement when taking positions with derivatives than US firms. Despite this, German firms are also more relaxed about derivatives, indicating a significantly lower level of concern about issues related to derivatives than US firms. This attitude is consistent with the German firms’ consistently stricter attitudes and policies towards controlling derivatives activities within the firm.
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Anticipating this problem, the Downie, McMillan and Nosal (1996) survey of Canadian firms was structured to ask question similar to those of the Wharton surveys of US firms. The responses of the Canadian firms were quite similar to those of the US firms limiting the informativeness of a comparative study.

Most likely, the similarity in results is due to the geographical and cultural proximity of Canada to the US as well as the similarities in the structure of the corporate sector. From the perspective of a cross-country study, a more interesting case would be to contrast US firms to those of another economically significant country where industrial structure and corporate culture are not as similar. With this is mind, a study of derivatives usage of German non-financial companies was conducted by Gebhardt and Russ (1998). It was designed as a parallel study to the 1995 Wharton survey in order to allow direct comparison with the US results.
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While companies have been using derivatives for many years, little has been known about the extent or pattern of their use because firms have not been required (until recently in the US, at least) to publicly report their derivatives activity. Unfortunately, the use of derivatives by companies only appears to receive attention in response to special cases of huge derivative related losses such as Barings, Procter&Gamble or Metallgesellschaft website.

The normal beneficial use of derivative instruments in the daily risk management activities of companies receives much less attention in the financial press. As a result, relatively little is known about the patterns of use or firms’ attitudes and policies regarding derivative use.
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One undeniable characteristic of the past few decades is greater concern with the volatility in foreign exchange rates, interest rates, market prices for securities, and commodity prices than in previous decades. These fluctuations in financial prices can have significant effects on the fortunes of companies. For example, large scale changes in exchange rates have lead to dramatic changes in the competitive structure of markets that have caused companies to be nearly driven out of markets where they formerly held comfortable market shares review.

Well known examples are the US firms Caterpillar and Kodak or the experiences of the German car producers Volkswagen1 and Porsche on the US market. Often times, management became aware of the importance of these price risks for the financial results of companies only after incurring significant losses.
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The scale of investment x is determined by the rent dissipation of the marginal producer, hence More info
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Our paper considered the case where moral hazard can be controlled by costly risk monitoring undertaken by banks. While the details of the equilibrium in the credit market are model specific, the logic of the second best described in our paper should apply to other models as well – if the equilibrium is characterized by excessive risk, financial integration may magnify this distortion.

This paper provides another example of immiserizing growth, this time due to “excessive risk” induced by the combination of low banks’ cost of funds and costly financial integration. In these circumstances limited liability induces a distortion, leading frequently to overborrowing. |n autarky, the damaging effect of the distortion is confined by the limited availability of domestic savings, which act both to restrict investment and to reduce the size of the distortion. Financial integration would magnify the cost of the “excessive risk” distortion, both by increasing the distortion and by increasing the volume of investment.

The message of the model is that sequencing matters — efficient domestic banking is a pre condition for successful financial integration. Our paper suggests that financial integration and reforming the banking sector are complementary policies, as the gain of each reform is magnified by the second. If one starts with a highly inefficient banking system, reforming it and improving its operation is a precondition for successful financial integration.
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We illustrate now the impact of changing the “generosity” of a deposit insurance scheme. For simplicity of exposition, we follow the assumptions of Section 2, where only idiosyncratic risk is present. Suppose that banks anticipate a partial bailout. Specifically, suppose that banks expect that, if their net income is negative, a fraction of the non-performing loans will be repaid by the public sector. In these circumstances banks’ expected profits (6) are modified to
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