Article Review on "Investors Perceptions Attitude Towards Financial Derivatives"

Article Review 5 pages (2091 words) Sources: 5

[EXCERPT] . . . .

Investors Perceptions

In the last several years, investors are having changing attitudes and perceptions about financial derivatives. This is because of the opportunity to increase their overall profit margins and reduce risks (depending upon the strategy that is utilized). In many cases, this is a part of larger strategy called hedging. To fully understand these shifts requires conducting a literature review of different scholarly articles on the subject. Together, these elements will highlight the way these changes are occurring and the overall scope of them on investors' attitudes towards derivatives.

According to Pennings (2010), investors' attitudes and beliefs about derivates are constantly shifting. This because hedging has become an important concept in increasing their overall returns and potentially reducing any kind of risks. However, there are contrasting beliefs among different classes utilizing a regression analysis model. These objectives will depend upon the type of investor and their focus on the percentage return. (Pennings, 2010)

As a result, Pennings determined that risks and attitudes will not be a single uniform standard which can be applied to all categories. Instead, there will be a focus on the manager's strategies and their firm's capital structure. This will impact the overall returns that are generated, the kind of tactics which are utilized, the levels of risk and the total percentage gains that is realized. (Pennings, 2010)

The information from this source is useful in demonstrating how investor attitudes and perceptions are constantly changing. This is occurring with them focusing on meeting different objectives such as the overall return in the portfolio and the underlying amounts of risk in the process. When this happens, the use of derivative instruments will vary depending upon these shifts and how they are impacting shareholder attitudes. This is illustrating that there will be contrasting beliefs about the utilization of these investment vehicles and the total returns they are providing to stakeholders. However, the data is somewhat ambiguous, by not showing what specific class of investors is focusing on utilizing these strategies. This means that more research must be conducted on different categories and determining which trends is common among select groups.

In some cases, the use of derivatives will be concentrating on utilizing the foreign exchange markets to protect against fluctuations in currencies. According to Aabo (2011), different manufacturing firms are often involved in these activities to help reduce the potential losses they will face from sudden changes in prices. This makes it more effective for them to plan ahead and export their products to different countries in the process. (Aabo, 2011)

Moreover, Aabo found that there were no differences in these tactics being utilized by family and large corporations (who were involved in similar activities). This is because both entities are seeking to reduce any kind risks and more effectively ship products to various customers around the world. When this happens, they will have greater stability in their earnings from any kind of sudden changes (Aabo, 2011)

The information from this source is useful in demonstrating how there are contrasting views about the uses of derivatives and the focus investors will have during the process. In this case, larger manufacturers will use these investment vehicles to reduce risks against sudden fluctuations and plan ahead for new challenges. However, the evidence is somewhat ambiguous, by not demonstrating the impact this will have on firms inside other industries. This means that more research must be conducted to determine who is utilizing hedging and derivatives as part of their overall strategy.

For investors, those managers which are utilizing derivatives are seen more favorably vs. those who do not. According to Koonce (2008), they will often evaluate the kinds of strategies that are being used and how they evaluate risks. In those situations, where these instruments are utilized as a part of the overall strategy; they believe that there is reduced chances of this negatively impacting their total returns. This is because derivatives have the ability to account for unforeseen changes and can mitigate the possibility of unlimited losses. (Koonce, 2008)

The information from this source is useful in showing how investors want some kind of protection against uncertainties. Those who are embracing this strategy will realize an increase in their bottom results. While at the same time, they are taking into account any uncertainties and the impact it will have on their portfolio. Yet, this research is failing to identify specific categories and their views on the utilization of these financial tools. This means that more research should be conducted which is illustrating precise groups and their beliefs in these areas.

However, the favorable views of derivatives to reduce risks are not applicable to every single class of investors or institutions. For instance, Zheng (2011) concluded that those who do not understand these concepts will be more apprehensive in using them. This was determined through conducting a survey of different Chinese agribusinesses. They found that majority of firms did not believe that this strategy will reduce risks or provide them with any kind of significant benefits. At which point, he concluded that those who were not informed or understood about this strategy were hesitant in utilizing derivatives to reduce any kind of risks. (Zheng, 2011)

This information is showing how the use of these investment vehicles will depend upon the financial education of investors and institutions. These factors will determine if they see the benefits of derivatives and their perceptions about how it can help them over the longer term. Further research can be conducted in the future, to decide how this will impact their decisions and if it is only affecting a particular nationality.

Moreover, Bezzina (2012) found that the levels of education investors have about these products will determine if they are utilizing these financial instruments. For those who are informed and understand derivatives, they will more than likely use strategies involving these areas to reduce their risks. The most notable include: greed, political uncertainty and any kind of sudden changes in economic conditions. This is the direct result of shifts that are occurring in protecting themselves against these factors. However, in those situations where investors are uninformed about derivatives, is the point they will become more apprehensive about these tools. This is because they do not see the long-term benefits it can provide to them. (Bezzina, 2012)

The information from this source is useful in showing how the underlying views and levels of education in derivatives will determine if they are successful over the long-term. However, these findings are ambiguous in failing to look at other factors that will influence views about these tactics. This means that further research must be conducted to show how these transformations are taking place and other areas which are influencing different perceptions.

In other cases, the attitudes and beliefs about derivatives will be continually shifting based upon the country and the attitudes that are embraced about this strategy. For example, Khediri (2010) determined that there are shifts in beliefs about this investment vehicle and the benefits it can provide to investors. In this particular study, it was concluded that French investors do not favor the use of these kinds of tools. This is because they do not see how they will help to reduce risks or offer any significant increases in valuations. (Khediri, 2010)

These insights are useful in demonstrating how there are contrasting perceptions about the value of derivatives and the impact it will have on the portfolio. This means that there will be shifting attitudes and beliefs depending upon the country. In this case, the findings are ambiguous by showing how a particular nationality will have different insights about derivatives. As a result, further research is needed to demonstrate other factors that will impact these perceptions and the views of using them inside various countries.

The main reason why there are contrasting opinions about the use of derivatives and the lasting effects are from: perceptions and the ability to produce superior results. For most investors and institutions, this can be challenging as they want to see proven performance. In many cases, they will evaluate something and determine if it can provide them with the returns they are looking for against the major market averages.

What Brown (2001) concluded is that there were no major changes in percentage gains in comparison with the indices. Instead, these shifts were taking place based upon the fact that individuals and institutional investors felt that they could see larger returns. From adjusting their strategy, when there were extreme amounts of volatility inside the markets. (Brown, 2001)

Furthermore, Brown determined that those who were successful utilizing derivatives were concentrating on meeting select objectives at predetermined points in time. This means that any kind of gains will vary with strategies (such as: hedging) working at select points. Those who understand it can deploy these tools to take advantage of disparities inside the markets during select periods. (Brown, 2011)

The information from this source is useful, in demonstrating some of the different reasons why there are contrasting views… READ MORE

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