The past two decades have seen a dramatic increase in firms’ use of financial derivative instruments for risk management. This increase in derivatives usage has coincided with an increase in the volume of theoretical and empirical risk management literature. The empirical literature attempts to examine the cross-sectional behaviour of firms and the determinants of derivative usage for risk management. Theory suggests that risk management can add value to a firm.
a. Discuss the relationship between financial distress, investment growth, managerial ownership, liquidity and profitability of a firm with derivatives usage of a firm.
b. Every company that uses international accounting standard must have a statement on their hedging activity. Download the 5 financial accounts of a company from any country. Read through the risk section and write a report their hedging activity, if any.
c. When comparing future and forward contracts, it has been said that future is more liquid but forwards are more flexible. Explain what this statement means and comment on how differences in contract liquidity and design flexibility might influence an investor’s preferences in choosing one instrument over the other.
d. Discuss on the current development and potential of the countries in the derivative market.