Paper
Journal of Derivatives & Hedge Funds (2007) 13, 26–32. doi:10.1057/palgrave.jdhf.1850060
Hybrid securities and commodity swaps; tools to hedge risk in emerging stock markets: Theoretical approach
Practical applications
The use of derivatives in corporate risk management has grown rapidly in recent years, fuelled in part by the success of the financial industry in creating a variety of over-the-counter and exchange-traded products. Although the types of risks confronting managers vary across industries, there is substantial commonality in the underlying rationale for the use of derivatives and the financial engineering techniques that are employed. Managerial risk aversion and incentive issues are important practical rationales for risk management in the investment industry. A substantial proportion of the firms in the industry are closely-held stocks and mutual companies, where managers are likely to exhibit risk aversion because of suboptimal diversification of corporate wealth, organisation-specific capital, and/or the absence of effective mechanisms for owners to use as disciplining devices.
Naser I Abumustafa1
Correspondence: Naser I. Abumustafa, Department of Finance and Economics, Gulf University for Science and Technology, Kuwait. Tel: (965) 2240130, ext. 5540; E-mail: Drnaser69@hotmail.com
1Naser I. Abumustafa, Associate Professor of Finance, is the acting director of the MBA programme at Gulf University for Science and Technology (GUST). He has an international reputation as an expert on Middle Eastern stock markets, especially Gulf Cooperation Council stock markets. His research, teaching, and consulting addresses regulatory and practitioner issues in risk trading and in investment management. He has written extensively about trading rules, transaction costs, index markets, and stock markets regulation and efficiency. He is the author of 12 articles in leading scholarly journals, including Applied Financial Economics, Development Journal, Journal of Applied Economics Letters and Risk Management Journal. He serves as a member of the Editorial Advisory Board for the International Research Journal of Finance and Economics and Journal of Middle Eastern Finance and Economics.
Received 12 December 2006; Revised 12 December 2006.
Abstract
This study presents hybrid securities and commodity swaps as a diversification channel in emerging stock markets, in particular, Gulf Cooperation Council (GCC). It is evident that derivative markets play a crucial part in the global financial system. The use of hybrid securities as a tool to hedge risk in emerging stock markets has, however, not been closely examined. Hybrid securities can play a vital role in the future of emerging stock markets. It may be considered a key capital management tool. The paper attempts to apply the appropriate mechanism of hybrid securities in emerging stock markets. Credit derivatives have many uses and provide flexibility to transfer and price credit risk more efficiently. The expected defaults in the GCC markets are expected to continue growing at a high rate. Credit derivatives are likely to be used more extensively in those situations where buying or selling in cash markets is cumbersome and less efficient.
Keywords:
hybrid securities, commodity swaps, Gulf Cooperation Council emerging markets, credit derivatives
