Motivations for hedging in Australian firms

By

Acknowledgment

My research supervisor and family helped me a lot in this research so I would say thanks to them.

Declaration

I take an oath that this research is my own work and it does not show the ideas of the university. I also take an oath that this research has not been submitted earlier for any educational purpose.

Abstract

This research will discuss the motivations of Australian firms to use hedging as a financial derivative. This research will analyze two groups of Australian firms. Both groups will comprise of 40 firms. One group will have firms that use hedging as financial derivative and other group will have firm that doesn't use hedging as financial derivative. The motivations of management to use hedging will the main research.

Contents

Acknowledgmentii

Declarationiii

Abstractiv

Chapter 1: introduction1

Background1

Problem statement1

Rationale2

Research question2

Chapter 2: literature review3

Hedging3

Motivations for hedging Taxation5

Risk-aversion6

Chapter 3: Methodology7

Mixed Research7

Overview of Qualitative and Quantitative Research Approaches7

Classification of research methods9

Multi-method studies9

Mixed method studies9

Steps in mixed methodology10

Strength and weakness of the mixed research:11

Strengths11

Weaknesses11

Research Design12

Literature Search12

Sample size12

Instrument for data collection13

Data analysis13

Reliability/Dependability13

Validity14

Ethical Considerations14

References15

Chapter 1: introduction

Background

Existing practices of firms shows that a lot of assumptions are considered while explaining the financial risk management. There are several objectives of the company which include profit maximization for the stake owners and the management itself. The firms are exposed to various financial risks such as change in the exchange rate, interest rate and others. In order to manage financial risk, firms use financial derivatives and hedging is one of the financial derivatives. (Abolafia 2008 . p.17)

Problem statement

Hedging is quite difficult in practice, as the profit and loss depends upon the cash price and future price relation at some point in the future, and these points are the times at which the hedged is done or it's taken off. (Ackermann 2007 P.27) Basis is another name for cash price and future price difference. If the future contract is priced according to its theoretical value, then the cost of carry should be equal to the cash price and future price difference. One of the risks involved in hedge is that the basis will change and this risk is called basis risk.Significance

This study will open a new perspective for research in this context. Not much research has been done on Australian firms, and this research will fill out the gaps in the existing literature. (Adam 2008 P.47)

Rationale

The data of Australian firms will be collected and analyzed in this research.

Research question

The research aims to answer the following questions• what is hedging?• What are the risks involved in it?• What are the motivations for Australian firms for choosing hedging? 

Chapter 2: literature review

Hedging

One of the most important investment strategy used by companies is called hedging and it has very simple principles. Hedging is becoming more and more popular worldwide due to its simple structure. Many companies consider hedging as an important tool when developing financial policy. (Adam 2008 p.27) What are the hedge funds?

Hedge funds are investment funds of a particular type. There is no legal definition, precise and formal terms. The term itself is misleading. The literal translation into French is "hedge funds", that is to say engaging in investment protection against changes in relevant ...