Derivatives are economically significant components for corporate hedging. It is an indisputable fact that financial and commodity derivatives help in risk management. One of the most important questions that needs to be addressed in hedging is how much to hedge. This issue contains four interesting research articles with special focus on pricing and hedging issues in the derivative market.

Haushalter (2000) comes out with very interesting findings on corporate hedging and shows that the extent of hedging is related to hedging costs and the basis risk associated with hedging instruments. Earlier, Ederington (1979) had proposed the most popular measure of hedging effectiveness.

When we look at the major theories of hedging like the traditional theory, theories of Holbrook Working, and the portfolio theory, it is the portfolio theory—considered superior to the other two theories—which suggests a method for measuring the hedging effectiveness of a futures market. This theory also provides a method for measuring the costs of hedging.

Investors hedge to obtain the best combination of risk and return. September and October 2008 were the most chaotic months in recent times, the markets suffering extraordinary losses due to the near-collapse of the global financial systems. One needs to seriously look at hedging in a recession environment. We need to evolve an efficient method for building a recession hedge, and examine how corporations cope with recession risk.

Measuring systematic risk for hedge funds and reporting to the regulatory authority has become a fundamental challenge. Considering the losses that the hedge funds have suffered, it is expected that investors will change the way they carry out due diligence and risk monitoring on their hedge funds investments. It is a matter of concern that most of the hedge funds do not properly report their risk exposures. Investors are deprived of information on their portfolio beta, or funds lack portfolio transparency.

Considering the latest developments in the global financial market, we request our esteemed contributors and readers to reflect on these topics and come out with quality contributions on the same.

- Sharon K Jose
Consulting Editor