Unraveling the Dynamics of Derivative-based Hedging: Does it Impact the Cost of Debt?
(2024) BUSN79 20241Department of Business Administration
- Abstract (Swedish)
- Purpose: To investigate whether a firm's hedging activities have an impact on the cost of debt. Moreover, the study aims to investigate any differences between the three categories of risk: foreign exchange rate risks (FX), interest rate risks (IR) and commodity price risks (CM) as well as the sources of benefit from hedging.
Methodology: The study is conducted on a panel data set, and the utilized econometric approach includes pooled OLS, fixed effects, and an interaction term to test the moderating effect of market imperfections. The dependent variable is yield spreads on corporate bonds, and the main explanatory variables are hedging of interest rates, currencies, commodity prices, or the total extent of hedging activities. The... (More) - Purpose: To investigate whether a firm's hedging activities have an impact on the cost of debt. Moreover, the study aims to investigate any differences between the three categories of risk: foreign exchange rate risks (FX), interest rate risks (IR) and commodity price risks (CM) as well as the sources of benefit from hedging.
Methodology: The study is conducted on a panel data set, and the utilized econometric approach includes pooled OLS, fixed effects, and an interaction term to test the moderating effect of market imperfections. The dependent variable is yield spreads on corporate bonds, and the main explanatory variables are hedging of interest rates, currencies, commodity prices, or the total extent of hedging activities. The sensitivity of the results is tested through several robustness tests.
Theoretical perspectives: The theoretical perspectives include Miller and Modigliani Ideal Capital Markets, Financial Distress, Agency theory, and Information Asymmetry.
Empirical foundation: The study consists of a sample of 1007 firm year observations on 186 non-financial, European firms with publicly traded bonds from the time period 2017-2022.
Conclusion: The study finds that the nominal amount of hedging is statistically significant, reducing the yield spread with 8 bps, implying a negative relationship to cost of debt. Furthermore, when studying the three categories of risk, the results indicate that IR hedge significantly reduces the yield spread while no such findings can be concluded for FX hedging or CM hedging. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9167788
- author
- Bark, Isak LU and Gerby, Jakob LU
- supervisor
- organization
- course
- BUSN79 20241
- year
- 2024
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Cost of debt, yield spread, hedging, IR, FX, CM, derivative-based hedging
- language
- English
- id
- 9167788
- date added to LUP
- 2024-08-07 15:39:52
- date last changed
- 2024-08-07 15:39:52
@misc{9167788,
abstract = {{Purpose: To investigate whether a firm's hedging activities have an impact on the cost of debt. Moreover, the study aims to investigate any differences between the three categories of risk: foreign exchange rate risks (FX), interest rate risks (IR) and commodity price risks (CM) as well as the sources of benefit from hedging.
Methodology: The study is conducted on a panel data set, and the utilized econometric approach includes pooled OLS, fixed effects, and an interaction term to test the moderating effect of market imperfections. The dependent variable is yield spreads on corporate bonds, and the main explanatory variables are hedging of interest rates, currencies, commodity prices, or the total extent of hedging activities. The sensitivity of the results is tested through several robustness tests.
Theoretical perspectives: The theoretical perspectives include Miller and Modigliani Ideal Capital Markets, Financial Distress, Agency theory, and Information Asymmetry.
Empirical foundation: The study consists of a sample of 1007 firm year observations on 186 non-financial, European firms with publicly traded bonds from the time period 2017-2022.
Conclusion: The study finds that the nominal amount of hedging is statistically significant, reducing the yield spread with 8 bps, implying a negative relationship to cost of debt. Furthermore, when studying the three categories of risk, the results indicate that IR hedge significantly reduces the yield spread while no such findings can be concluded for FX hedging or CM hedging.}},
author = {{Bark, Isak and Gerby, Jakob}},
language = {{eng}},
note = {{Student Paper}},
title = {{Unraveling the Dynamics of Derivative-based Hedging: Does it Impact the Cost of Debt?}},
year = {{2024}},
}