Table of Contents

Macro-Hedging for Commodity Exporters

Damiano Sandri, International Monetary Fund (IMF) - Research Department
Eduardo Borensztein, International Monetary Fund (IMF) - Developing Country Studies Division
Olivier Jeanne, International Monetary Fund (IMF) - Research Department, Ecole Nationale des Ponts et Chaussees (ENPC), Centre for Economic Policy Research (CEPR)

Credit Default Swap Spreads and Variance Risk Premia

Hao Wang, Tsinghua University
Hao Zhou, Federal Reserve Board - Risk Analysis Section
Yi Zhou, Division of Finance, Michael F. Price College of Business, University of Oklahoma

Hedging European Derivatives with the Polynomial Variance Swap Under Uncertain Volatility Environments

Akihiko Takahashi, University of Tokyo - Graduate School of Economics
Yukihiro Tsuzuki, Mizuho-DL Financial Technology Co., Ltd.
Akira Yamazaki, Mizuho-DL Financial Technology Co., Ltd.

Lead-Lag Relationship between the Spot Index and Futures Price for the Turkish Derivatives Exchange

Ulkem Basdas, Middle East Technical University


DERIVATIVES ABSTRACTS

"Macro-Hedging for Commodity Exporters" Free Download
IMF Working Paper No. 09/229

DAMIANO SANDRI, International Monetary Fund (IMF) - Research Department
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EDUARDO BORENSZTEIN, International Monetary Fund (IMF) - Developing Country Studies Division
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OLIVIER JEANNE, International Monetary Fund (IMF) - Research Department, Ecole Nationale des Ponts et Chaussees (ENPC), Centre for Economic Policy Research (CEPR)
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This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country's need to hold foreign assets as precautionary savings (or by improving the country's ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.

"Credit Default Swap Spreads and Variance Risk Premia" Free Download

HAO WANG, Tsinghua University
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HAO ZHOU, Federal Reserve Board - Risk Analysis Section
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YI ZHOU, Division of Finance, Michael F. Price College of Business, University of Oklahoma
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We find that variance risk premia, defined as the spread between the option-implied and expected variances, have a prominent predictability for the credit default swap spreads at individual firm level. Such a predictability cannot be crowded out by that of the market and firm level credit risk factors identified in previous research. We demonstrate that the strong predictability of implied variance for credit spreads is mostly explained by either variance premium or expected variance. Our findings suggest that variance risk premium is a relatively clean measure of a firm’s exposure to macroeconomic uncertainty or systematic variance risk, while option-implied variance may be contaminated by idiosyncratic variance risk. Such a result is consistent with the market level evidence that variance risk premium predicts credit spread variation.

"Hedging European Derivatives with the Polynomial Variance Swap Under Uncertain Volatility Environments" Free Download
CARF Working Paper Series No. CARF-F-161

AKIHIKO TAKAHASHI, University of Tokyo - Graduate School of Economics
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YUKIHIRO TSUZUKI, Mizuho-DL Financial Technology Co., Ltd.
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AKIRA YAMAZAKI, Mizuho-DL Financial Technology Co., Ltd.
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This paper proposes a new hedging scheme of European derivatives under uncertain volatility environments, in which a weighted variance swap called the polynomial variance swap is added to the Black-Scholes delta hedging for managing exposure to volatility risk. In general, under these environments one cannot hedge the derivatives completely by using dynamic trading of only an underlying asset owing to volatility risk. Then, for hedging uncertain volatility risk, we design the polynomial variance, which can be dependent on the level of the underlying asset price. It is shown that the polynomial variance swap is not perfect, but more efficient as a hedging tool for the volatility exposure than the standard variance swap. In addition, our hedging scheme has a preferable property that any information on the volatility process of the underlying asset price is unnecessary. To demonstrate robustness of our scheme, we implement Monte Carlo simulation tests with three different settings, and compare the hedging performance of our scheme with that of standard dynamic hedging schemes such as the minimum-variance hedging. As a result, it is found that our scheme outperforms the others in all test cases. Moreover, it is noteworthy that the scheme proposed in this paper continues to be robust against model risks.

"Lead-Lag Relationship between the Spot Index and Futures Price for the Turkish Derivatives Exchange" Free Download

ULKEM BASDAS, Middle East Technical University
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This paper examines the lead-lag relationship between the Istanbul Stock Exchange 30 (ISE 30) Index and index futures prices at the Turkish Derivatives Exchange using daily observations from February 2005 to May 2008. It is found out that spot prices lead the futures prices for ISE 30 Index contrary to the results for different countries. Besides, the forecasting performances of Error Correction Model (ECM), ECM with Cost of Carry (COC), Autoregressive Integrated Moving Average (ARIMA) and Vector Autoregressive (VAR) Model are compared. The results support the superior performance of ECM. This study underlines the difference in direction of the lead-lag relation for Turkey that has a significant value for traders, and the performance of ECM for forecasting purposes.

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Advisory Board

Derivatives

EDWARD I. ALTMAN
Max L. Heine Professor of Finance and Vice Director, New York University - Salomon Center

DENNIS R. CAPOZZA
Professor of Finance and Dykema Professor of Business Administration, University of Michigan - Stephen M. Ross School of Business

DON CHEW
Morgan Stanley Investment Management

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago Graduate School of Business, National Bureau of Economic Research (NBER), Program Chair and President Elect, American Finance Association

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Booth School of Business

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

JONATHAN M. KARPOFF
Norman J. Metcalfe Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Thomas F. Keller of Business Administration, Duke University

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management