Essays on Corporate Risk Management
Isin, Adnan Anil
Thesis or dissertation
University of Exeter
Reason for embargo
To enable publication of the thesis
This thesis examines operational and financial implications of jet fuel risk management. The first element of the thesis use global sample of 54 airline companies from 2000 to 2012, resulting in 411 firm-year observations. The results show that hedging strategies are effective at reducing the variability of operating cash flows and capital expenditures. The results also provide evidence that jet fuel hedging is associated with lower fuel expenses as a percentage of operating expenses. Partitioning the sample into the low cost carrier and major carrier business model sub-samples, the study identifies value premium of 5% to 8% of the average total market value associated with hedging for low cost carriers. These results are robust to fixed effects and instrumental variable regressions and empirically support value maximization via hedging when firms have high financial distress costs and significant investment opportunities. Finally it is evidenced that government ownership reduces firm value, capital expenditures, profitability and hedging ratios. However, lower firm values observed for airline companies with government ownership is not associated with their hedging practices. The second element of the thesis conducts two case studies using the fuel consumption data of Turkish Airlines. In one of the case studies a hedging scenario using a spectrum of derivative instruments is compared to a scenario of no hedging. In the other case study a hedging scenario using a spectrum of derivative instruments is compared to the actual hedging program of Turkish Airlines. Results indicate that regardless of the derivative instruments used hedging could have saved hundreds of millions of dollars in fuel bill for Turkish Airlines. Needless to say, having saved millions in fuel costs could have significantly improved operational and financial performance of Turkish Airlines. Moreover, the results indicate that the inclusion of non-linear pay-off derivative instruments to a portfolio of linear pay-off derivative instruments significantly reduce the cash flow exposure of the combined portfolio. The third element of this thesis investigates the term, selective hedging, which is a hedging methodology that incorporates managements’ so called market knowledge and expectations. The study aims to add a third dimension, which is the choice of derivative instrument, on the selective hedging argument which is limited to the timing and the magnitude of the hedges. It is acknowledged that the choice of derivative instrument has greater cash flow implications for firms that are dependent on exchange traded derivative instruments with limited and/or no access to over the counter derivatives. These firms generally have insufficient credit rating to be eligible to be counterparty to an arm’s length trades. Commodity end-users such as airline companies constitute relatively little proportion of total oil consumption which is around the 4% of the total world consumption (IATA, 2012). As a result, it is natural to expect the management of these firms with limited and/or no access to over the counter derivatives to take into consideration the market sentiment in their hedging decision. Using the implied volatility functions of oil options on futures traded in NYMEX, this study tests whether the implied volatility observed in oil contracts are loaded with useful information about the direction of oil prices and whether an oil risk hedger can benefit from this information, if any. The results show that the implied volatilities observed in oil markets do not provide privileged information about the direction of oil prices, at least for the short end portion of the contracts. These results might be affected by the time series properties of the observations.
Gyoshev, Stanley B.
PhD in Finance