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Corporate risk management and measurement: Theory and empirical evidence on commodity -based corporations

Sam Young Chung, University of Massachusetts Amherst


The use of derivatives in corporate risk management has grown rapidly in recent years, motivated in part by the success of the financial industry in creating a variety of over-the-counter and exchange-traded products. To evaluate the effectiveness of a risk management program or to test financial theories of risk management, a firm's underlying risk exposure must be known. While survey evidence and some empirical evidence exist on how and why a firm engages in various risk management activities through derivatives markets (e.g., Bodnar and Gebhardt 1996, and Tufano 1996, 1998), there is little empirical research examining the effect of derivative usage on a firm's risk and return characteristics. This dissertation examines a sample of gold producing firms whose derivative strategies are known and investigates how their equity and accounting based performances are related with the degree of derivative usage and the price uncertainty of their underlying products. In addition, using insights from both the various Value-at-Risk and multifactor literature, the ‘marginal’ Value-at-Risk framework is applied to measure the market risk exposures of the commodity based corporations. The dissertation consists of three chapters. The first chapter, Effects of Derivatives Usage on Commodity Based Corporations, provides descriptive evidence on the risk management activities of a sample of gold mining firms and empirically investigates whether a firm's use of derivatives materially reduces the overall expected equity-return risk as well as the earnings risk measured by analysts' forecasts. The second chapter, Risk Measurements for Derivatives Users and Non-Users, examines two firms who have well articulated derivative use strategies that are diametrically opposite. This chapter focused on measuring a firm's risk exposure and how a hedging policy alters the exposure. The last chapter, An Investigation of Gold Prices in Spot and Futures Market, provides empirical evidence of the gold price movement during the last decade and explores the nature of the both cross sectional and time series relationship between prices in the gold futures market and spot market. The results show, in general, both the spot and futures gold prices react at the same time (within the same-day) and in the same way to new information coming to the market. The potential contributions of this dissertation to the corporate risk management literature include that; this study (1) empirically investigates the consequences of the derivatives usage on a firm's expected equity return volatility as well as forecasted earnings volatility, and (2) examines how financial markets price the risk of a firm's underlying assets.

Subject Area

Management|Business community|Banking

Recommended Citation

Chung, Sam Young, "Corporate risk management and measurement: Theory and empirical evidence on commodity -based corporations" (2000). Doctoral Dissertations Available from Proquest. AAI9978485.