Hedging And Firm Value

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Hedging and Firm Value : Oil and Gas companies in EU and Norway

Table of Contents



Purpose of the Study3

Problem Statement4

Background of the Problem4

Aims and Objectives5



Financial hedging6

Hedge accounting according to IAS 398

Risk Management and Hedge Funds19





Application of hedge accounting32

Univariate analysis32

Multivariate analysis35

Robustness tests42

Influence of IAS 39 hedge accounting on financial hedging44

Univariate analysis44

Multivariate analysis48

Robustness tests53




Chapter 1


Purpose of the Study

From the time of its inception in 1998, IAS 39 “Financial Instruments: Recognition and Measurement” has been faced with furious criticism. One of the focal points of the argument is the set of directions for hedge accounting promulgated by the standards. Accountants, auditors and academics condemn the directions as overly convoluted, restrictive, and excessively burdensome (Osterland 2000; AFP 2002, Pollock 2005). With hedging, businesses strive to decrease exposures to dangers by setting up offsetting places, normally with the assist of derivative economic instruments. Under usual accounting directions, the hedged piece and the derivative are often accounted for distinctly in order that profits and deficiency producing from the two devices are not described simultaneously in earnings or loss. Hedge accounting is a set of exceptional directions conceived to double-check that profits and deficiency on hedged pieces and hedging devices are identified in the identical time span, thereby stopping profits instability that is not economically justified. However, in alignment to confirm that managers will not misuse the exclusions from general acknowledgement and estimation values for profits administration reasons, IAS 39 characterises directions under which hedge accounting may be applied.


Problem Statement

It is this set of comprehensive directions which makes hedge accounting under IAS 39 convoluted and burdensome for companies. The first of the overhead three extracts, taken from the 2005 economic report of BASF, a large EU chemical business, displays that the limits enforced by the benchmark induce businesses to shrink back from applying hedge accounting entirely, even though this is probable to outcome in expanded profits volatility. The second of the overhead extracts, approaching from the CFO of a large British pharmaceutical business, points to an accusation that is even more serious. It is occasionally contended that IAS 39 may induce businesses to adjust their hedging schemes, in specific to decrease the grade of hedging, because the schemes they would commonly request are not matching with the directions for hedge accounting under IAS 39 (Osterland 2000, Pollock 2005).


Background of the Problem

IAS 39 may therefore present businesses with a dilemma. They can either apply those risk administration schemes which they address optimal from an financial issue of outlook and accept profits instability if hedge accounting will not be applied. Alternatively, they can apply sub-optimal risk administration schemes which permit the submission of hedge accounting and are thus attached with a smaller instability of described earnings. In both situations, firm worth is probable to be influenced adversely.

Interestingly, regardless of the intensive argument surrounding IAS 39 there is very little empirical clues on the submission of hedge accounting by non-financial companies, and on the leverage ...
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