Financial Derivatives and Risk

¶ … Miller, Winchel and Koonce (2015) made use of psychology research (which encapsulates an important derivatives context element - that organizational leaders display careful decision-making and, hence, have a right to employ derivatives), to posit that financial backers' perceptions of companies utilizing derivatives is based on company or industrial norms.

The contention is that if companies suffer a negative result owing to its derivative action, financiers will more favorably assess the company, believing that its executives were more careful and had a sound basis for their choice, if derivative application is in line with company or industrial norms, as opposed to contradicting the norms. That is, the authors posited that company or industrial norms systematically changed the way an investor perceived a company's derivative usage.

In a Turkey-specific study, authors Ayturk, Yanik and Gurbuz (2016) studied the application of rate of interest, currency, commodity and other financial derivatives, together with its impact on company value. The sample for the research was non-financial companies in the country, analyzed for the period between 2007 and 2013. A mere 36.41% of organizations studied by the scholars made use of derivatives for hedging risks linked to product prices, currency, and the rate of interest.

A positive link was discovered between company value and derivatives application, only if system generalized method of moments (GMM) estimators and Tobin's Q. ratio analysis were utilized. The study authors also undertook separate examinations of interest rate, currency, and product price hedging'simpact. Outcomes obtained were similar to the outcomes of general application of derivatives. Overall, most outcomes from the research revealed the fact that financial derivative application has no appreciable impact on company value in the Republic of Turkey.

Corporate stakeholders have insisted on ERM (enterprise risk management) in response to organizational governance systems and defective risk management. ERM ought to be considered a combination of conventional risk governance and management, each having its own respective determinants. Risk governance application represents a dynamic step that transcends conventional risk management. Lundqvist's (2015) research deals with ERM's complexity by separating it into conventional risk governance and management elements and scrutinizing those elements' determinants at the same time, yet distinct from one another.

This research marks a step towards validating ERM's current ad hoc theoretical premises and suggests that companies are adopting ERM based on stakeholder demands to exhibit improved risk management structure governance. Iqbal's (2015) research looks at whether oil and gas companies' chief executives' educational qualifications and age explain their adoption of hedging practices. Degrees, age, and university/college of hedgers (who adopted derivative usage) and non-hedgers (who never hedged risks) were compared.

The researcher discovered evidence of a larger share of hedge executives holding petroleum-connected degrees, with a smaller share having business degrees, as compared with non-hedge executives. Logistic regression outcomes suggest that chief executives' age explains financial derivative usage within the oil and gas sector. Adding to the aforementioned result, a recent behavioral finance study demonstrated how investors' views (such as, perception of risk, expected returns and risk tolerance) influenced hypothetical risk-taking and trading activities.

But can these perceptions help explain real risk-taking and trading behaviors? Hoffman, Pennings and Post's (2015) research revealed the following perceptions held by investors and any modifications to them are key drivers of real-time risk-taking and trading behaviors: 1. Investors exhibiting positive changes and higher return expectations levels will more likely trade, employ derivatives, show increased turnover, and trade greater sums per transaction. 1. Investors.