The use of derivatives in risk management

: a study of the Portuguese listed companies

Abstract

Companies try their hardest to perform in environments and markets that they cannot control and where they do not have perfect information. In order to thrive it is necessary to be exposed to risks and in most industries it has been proven to be a survival of the fittest. One of the most used tools to hedge risk are financial instruments, more particularly derivatives. The use of derivatives is immersed in controversy as its incorrect and unknown use can cause catastrophic consequences as it was seen during the financial crisis of 2008 and 2009 where Credit Default Swaps and Collateralized Debt Obligations were scrutinized by the public opinion. Literature on this subject is very diverse, highlighting the benefits that can come from derivatives usage but also taking the full implications of this instrument with a grain of salt. This study analyses the 15 non-financial companies from the Portuguese index, PSI 20 from the period of 2013 to 2015 and assesses what are the main risks these enterprises face in their daily activity, such as interest rate or market risk, in firms dependent on the price of a specific commodity and how derivatives have an impact in the Risk Management of these firms and can help the business reduce its financing costs and assure its sustainability against unpleasant surprises. Using qualitative and quantitative analysis we will try to isolate the variables that have a correlation with the use of derivatives in a firm and understand if they could be of added value has a hedging tool.

Date of Award	10 Jul 2017
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Cunha (Supervisor)