Corporate Risk Management Using Financial Derivatives

Abstract

Modern corporations are exposed to multifaceted risks because oil prices, interest rates, and exchange rates can change greatly, thus affecting the company's profits and stock prices. Companies need to manage these risks and maintain value and stability. This paper mainly studies how financial derivatives (futures contracts) can help companies cope with risks and maintain stable performance in different market environments. Panel data regression, quantile regression, and Generalized Autoregressive Conditional Heteroskedasticity Model (GARCH) are used to analyze the data of airlines in the Asia-Pacific region and financial companies in South Africa and Africa, respectively. The results show that derivatives can reduce the negative impact of oil price fluctuations on returns and make stock returns more stable. It performs best under extreme market conditions, and gold futures perform best. The use of derivatives can improve the risk-adjusted performance, that is, Sharp ratio. However, its effectiveness is affected by the types of derivative products and market conditions, and there are some problems, such as over-reliance on models, difficulties in implementation, and a lack of clear information.