Hong Kong vs Singapore: How do Firms Operate and Reactions on Derivatives
There is a perception in some quarters that Asian companies are ignorant, old-fashion and uneducated in their use of derivatives. According to their bankers, Asian corporate risk management executives lack world’s best practice. This study of 131 firms finds that such a reputation regarding the use of derivatives does not generally deserve in Hong Kong or in Singapore.
Contrary to popular perception, a remarkably large number of non-financial corporations that are locate in Hong Kong and Singapore already adopt derivatives and use them with high intensity. They are more likely to use foreign exchange and interest rate derivatives of all types, including option products. While their usage of derivatives exceeds that in many other advanced nations. Some failures in organisational structures for managing derivative positions are, however, evident.
Where surveys have been conduct they often make the mistake of including many countries within a single sample, yet Asian countries vary enormously. Allayannis, Brown and Klapperfind that use of derivatives varies between Asian countries depending on international country risk, GDP per capita, creditor rights, judicial efficiency, derivative market trading volume, the existence of a British legal system and interest rates. It is therefore very difficult to make generalisations about Asian risk management.
Hong Kong and Singapore are choose for being compare because they have many things in common: similar economic size and GDP per capita, a common Chinese/British business culture and a British legal system resulting from a colonial history, and financial sectors that have be develop for a considerable period of time.
The main difference between the two financial centres is the extent to which government intervenes. In the case of Singapore while the government of Hong Kong is more laissez- faire. While government intervention is often regard as anathema to the development of financial markets. In the case of Singapore the government has played a pivotal role in their development.
Not only are Asian firms more likely to hedge using derivatives, but when derivatives are used a higher proportion of the exposure tends to be hedged. This evidence further supports the conclusion that Asian firms are enthusiastic adopters of derivatives.
High hedging intensity is particularly notable in Singapore. When comparing Singapore with Hong Kong, Singapore firms are significantly more likely to hedge 76- 100% of the exposure. Singapore firms are also more likely to hedge on-balance sheet commitments. These two facts in combination suggest that Singapore based firms are aggressive hedgers of on-balance sheet commitments.
Difference in risk management
Studies find very little difference in risk management practice between Hong Kong and Singapore. Despite some differences in government policy between the two countries it would appear that risk management practice for non- financial corporations is similar in almost every respect. In general risk management in Hong Kong and Singapore is quite similar to that in the United States.
The most notable difference is the very high penetration of derivatives in the Asian firms relative to the US, especially among small and medium-sized firms. Not only do a higher proportion of the Asian firms surveyed use derivatives. But their intensity of use also exceeds that in the US.
Derivatives for managing foreign exchange risk are particularly popular, probably reflecting the importance of exports and imports for firms in Hong Kong and Singapore, as well as the popularity of offshore borrowing. Interest rate derivatives are widely using but non-financial corporations in these centres are less likely to use derivatives for managing commodity and equity price risk.
Hong Kong and Singaporean firms are similar
Hong Kong and Singaporean firms are also more likely to use option products than those in the United States, but among derivatives users, forwards are generally preferred. This finding may be related to the significantly greater role of market views in managing risk. Firms included in the previous studies are much more likely to selectively hedge or actively manage their exposures.
A further difference is noted in the oversight of derivatives transactions. Asian firms are less rigorous in their policies relating to derivatives and the reporting of and valuation of derivatives. This is true even for those firms employing more speculative risk management styles. Such a finding is worrying given the popularity of this approach.
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