Essay on Research
Recent financial theories argued firms can increase their values through hedging by reducing taxable income, agency cost and the cost of financial distress. This report provides a qualitative and quantitative analysis of corporate risk management for the company Air New Zealand. We uses a time series OLS regression model. The fair value of derivatives is used as dependent variable to measure the extent of financial instrument usage. The result shows that the use of derivatives by Air NZ fails to add value to the company.
FINA781 Report Page 1
Air New Zealand Limited is the national airline and flag carrier of New Zealand. Based in Auckland, New Zealand, the airline …show more content…
FINA781 Report Page 2
However, a complication is that when airlines need fuel price hedge the most – on the edge of bankruptcy – they do not have the liquidity to buy oil futures as they can’t provide the margin requirements; they could buy options though, but again this costs cash, increasing today’s cash flow risk to avoid potential future risk. This was argued by Weiss and Maher (2009) “financial leverage and derivatives used to protect from fuel price volatility are insignificantly associated with the hedging rank”.
2.2. Foreign Currency Risk: Exchange rate risk is equally important to manage because it is related to Air NZ profitability (Loudon, 2004). Exchange rates influence the tourist numbers both internationally and domestically, it also influences the revenue and