Browsing by Author "Strydom, Barry Stephen."

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An evaluation of the use of currency options as an alternative hedging strategy to forward exchange contracts for the management of foreign exchange risk in a multinational firm.
(2006) Soopal, D. C.; Strydom, Barry Stephen.
Currency exposure has become a widespread issue as more corporations of all sizes source and sell in overseas markets and compete both at home and abroad with international companies. Very few companies are unaffected by currency risk, whether directly or indirectly. Businesses that source products from foreign countries face the risk that exchange rate movement will erode gross margins if competition prevents selling prices from rising in tandem, while resource-based companies face the uncertainty associated with the fact that the world's commodities markets are denominated in US Dollars or Pounds Sterling while their costs are often denominated in their local currencies. Businesses that ignore exchange rate volatility expose themselves to unnecessary risk, which could have significant consequences if exchange rates suddenly move unfavourably. The volatility of the South African Rand over the past few years is forcing treasurers and other managers responsible for international trade to look anew at how South African exchange rate fluctuations affect their company's results. Many companies have suffered from the effects of fluctuating exchange rates; some have reported losses running into millions of Rand. While more and more firms realize that they should manage foreign exchange risk, not all of them have come up with an appropriate management strategy. There has always been a great deal of debate over the best approach to hedging, or the best methods to forecast exchange rates; however hedging is of the utmost importance for companies. With the recent volatility of the rand, the multinational firm covered in this thesis, showed foreign exchange losses amounting to several millions, using forward exchange contracts to cover its high foreign exchange exposures. The major disadvantage of the forward contract as experienced by the firm and shown in this thesis is that it is a legally binding agreement and thus the firm was bound to accept the agreed exchange rate and also the fact that the exchange itself had to be done. If the commercial reason for the exchange disappeared, the cost of cancelling the forward contract would be quite high. In addition, if the exchange rate at maturity was more favourable to the firm than the one agreed to in the forward contract, the firm will still have to honour the contract and will not be able to take advantage of the favourable exchange rate. Thus, with FEC there is the elimination of the opportunity for profit, should exchange rates turn out favourably. When purchasing a currency option, however, the holder is protected from downward movements in the exchange rate whist still having the opportunity to benefit if the currency moves favourably. Hence, the purpose of this thesis was to evaluate the use of currency options as an alternative hedging strategy to forward exchange contracts to manage the firm's foreign exchange risk. It was found that, had the firm used currency options as compared to FEC over the last four years, the firm would have made significant saving in spite of the option premium. The firm would have enjoyed the flexibility offered by currency options, that is, to let the contract lapse when it would not be to the firm's advantage thus making a lower payment for its imports than would be paid under the forward exchange contract for the same period. The results were tested over a period of four years to prove that the difference in payments using the FEC and the currency options were statistically significant. What was apparent from the research, however, was that though the multinational firm could choose from a vast array of financial instruments and currency derivatives to manage its foreign exchange risk, the firm chose to stick to using forward exchange contracts. The reasons varied from fear of dealing with the complexities of the many instruments available on the market to the limited resources within the foreign exchange department to understand the technicalities of the various instruments. The investigation revealed though forward cover as used by the firm was more efficient in terms of ease of use. Currency options when applied to cover the firm's foreign imports resulted in less cash outflow, making it better and more profitable than forward exchange contracts. Options contract, though more expensive, would have allowed the firms to let the option lapse and therefore benefit from spot exchange rates if these were more favourable.
The applicability of the risk-free rate proxy in South Africa : a zero-beta approach.
(2009) Charteris, Ailie Heather.; Strydom, Barry Stephen.
An assessment of the current status, and future development, of the Pietermaritzburg footwear industry as a cluster.
(2003) Strydom, Barry Stephen.; Hickson, Michael.
While the South African footwear industry is a relatively modest contributor to both GDP and employment in the South African economy, it has historically played a dominant role in the economy of Pietermaritzburg. The opening up of South Africa's markets to the import of cheap shoes from the Far East, particularly China, together with large quantities of shoes smuggled into the country, has had a catastrophic impact upon the South African footwear industry. Due to its relative concentration of footwear manufacturers, the Pietermaritzburg footwear industry has been particularly hard hit by these developments and has suffered a decline in both production and employment. The well-documented success of footwear clusters in Italy, Brazil and Mexico have lead local researchers and policy-makers to conclude that clustering provides a potential solution to the challenges facing the Pietermaritzburg footwear industry. The discussion concerning the future development of the Pietermaritzburg footwear industry has, to date, simply assumed that it is a cluster without any actual research to verify this assumption. In addition, the concept of clustering is often used by these authors without defining what is meant by the term or how the concept of clustering can practically be applied in the context of the Pietermaritzburg footwear industry. This study seeks to address this deficiency by firstly examining the theory pertaining to the clustering concept, particularly what a cluster is, what types of clusters exist and how clusters can be developed, and secondly by conducting exploratory research to evaluate to what extent the Pietermaritzburg footwear industry can be viewed as a cluster, and if so what type of a cluster, and what steps are required to develop it as a cluster. Secondary data analysis was performed on material relating to the South African footwear industry in general and the Pietermaritzburg footwear industry in particular. This analysis was combined with primary data gathered by means of interviews conducted with stakeholders in the Pietermaritzburg footwear industry to assess the industry's conformity to the theoretical definition of a cluster. A sample of thirty-three individuals, including manufacturers, suppliers and trade union representatives, was interviewed using a non-scheduled structured interview technique. The study concluded that the Pietermaritzburg footwear industry exhibits a high degree of geographic concentration and active business channels that do achieve significant synergies in certain areas. However, it was found that the industry does not meet the final characteristic of collective action. As a result it is argued that the Pietermaritzburg footwear industry would appear to show sufficient conformity to the requirements to warrant its description as a cluster but that it probably conforms most closely to the 'latent' or 'underachieving' cluster classification. Finally, the dissertation presents a number of recommendations for policy-makers and other role players for the development of the Pietermaritzburg footwear industry as a cluster. Salient recommendations include the importance of conducting research that can be used to persuade manufacturers of the benefit of clustering together; the need to appoint an experienced broker to actively facilitate the development of the cluster concept; and the importance of addressing gaps in the supply-chain.
Explaining the cross-section of share returns in South Africa using macroeconomic factor models.
(2016) Charteris, Ailie Heather.; Fairburn, James A.; Strydom, Barry Stephen.
Understanding asset prices is critical for the decision-making of many; from professional and individual investors, who seek to earn the highest possible return from their investments, to governments and corporates evaluating investment and consumption choices. Given that the behaviour of asset prices may differ across countries, especially across varying levels of development, applying knowledge of the determinants of asset prices from one country to another may not be appropriate. Asset pricing models can typically be grouped into one of two categories – portfolio or macroeconomic. The principle focus of this study is on models which fall under the latter grouping, where little research has been conducted on the South African market. These models are concerned with identifying the true risk factors which drive share returns, in contrast to portfolio-based models, which simply measure risk as the sensitivity of a share’s returns to portfolios of securities. The consumption-based capital asset pricing model (CAPM), which links consumption to investor behaviour in their demand for securities, provides the foundation for the majority of the macroeconomic models. Labour income and household wealth are seen as two critical measures that are linked to the consumption decisions of investors and several models which have incorporated these two factors are evaluated in this study. In particular, those of Lettau and Ludvigson (2001b), Piazzesi, Schneider, and Tuzel (2003, 2007), Lustig and van Nieuwerburgh (2005), Santos and Veronesi (2006) and Yogo (2006) are examined to assess their ability to explain the size and value anomalies on the Johannesburg Stock Exchange (JSE). The results are compared to several portfolio-based models including the CAPM, the conditional CAPM and the Fama and French (1993) three-factor model. The models are tested over the period June 1990 to April 2013 using a comprehensive sample of JSE-listed shares based on the Fama and MacBeth (1973) and generalised method of moments methods. The study finds that many of the macroeconomic models are less successful in explaining returns of South African shares compared to the developed markets which have been examined internationally. However, there is weak evidence to suggest that returns are correlated with factors which capture how investors’ returns vary with labour income, housing wealth and consumption. In particular, value shares earn higher returns than growth shares partly to compensate investors for greater risk in the macroeconomy where risk is captured by the interaction of consumption, asset wealth and labour income, while small shares are more sensitive to shocks in housing scarcity thus partially accounting for their higher returns compared to larger shares. The results of this study are analysed in conjunction with the international evidence so as to consider possible reasons for the weaker results obtained and the implications for understanding the factors that drive assets prices are reviewed. Finally, suggestions for future research are provided.
The impact of demographic factors on subjective financial risk tolerance : a South African study.
(2011) Metherell, Craig.; Strydom, Barry Stephen.
Financial risk tolerance, an investor’s appetite for financial risk, is an extremely important aspect that needs to be considered when constructing investment portfolios. Evidence as to how risk tolerance should be measured is mixed, with each method having its own strengths and weaknesses. It can be determined both objectively and subjectively, depending on the method used, and can be influenced by a variety of demographic characteristics. Debate as to how certain demographic factors influence risk tolerance is widespread, providing support for further study in this field, particularly from a South African perspective. The purpose of this study was to investigate to what extent demographic factors influenced an individual’s willingness to take on levels of financial risk. The study used an existing, but adapted, subjective questionnaire to determine the risk tolerance levels of a sample of respondents. Respondents were categorised at an aggregate level as either being below or above average risk tolerant. A Binary Logistic model was used to analyse the effect of the independent demographic variables on risk tolerance and it was found that age and gender were significantly related to risk tolerance, whilst there was mixed evidence as to the relationship between risk tolerance and race as well as income. The findings from the study provide new evidence from a wider South African sample and could be used by financial advisors to improve their understanding of risk tolerance and its demographic determinants, as well as companies wishing to align their employees’ risk profiles with the overall company risk profile, as examples.
The impact of incorporating a bond index into the proxy for the market portfolio.
(2011) Baines, Donald.; Strydom, Barry Stephen.; Christison, Andrew.
The Capital Asset Pricing model (CAPM) is the most widely used equity valuation model in both the United States of America (U.S.) and South Africa, thus its importance in corporate finance cannot be underestimated. The largest criticism of the CAPM lies in the difficulties with estimating its parameters and in particular the return on the market parameter. Roll (1977) believed that it is impossible to estimate the market portfolio let alone find a good proxy for it. The common trend amongst practitioners is to use a broad based stock index such as the S&P 500 or in South Africa‟s case the All Share Index (ALSI) as a proxy for the market portfolio. However these methods are questionable, as the market portfolio theoretically contains all risky assets held in proportion to their market value, and stock indices ignore large asset classes such as bonds. Furthermore, using a broad based stock index in the South African context ignores South African specific problems such as the supposed segregation of the market to the Resource and Financial and Industrial sectors. Therefore the purpose of this study was to determine whether simply using the broad based stock index, the ALSI, as a proxy for the market portfolio would suffice or whether the inclusion of debt instruments and the acknowledgement of the segregation on the JSE would enhance the proxy‟s performances. First a set of theoretical requirements that a proxy must satisfy to be considered a suitable proxy for the market portfolio were derived. Then a review of literature on the matter was undertaken, which showed that studies in both the U.S. and South Africa had had mixed results. Next, the various proxies were formed, and tested using the two-pass regression method. The two-pass regressions that were run with the model comprising solely of the ALSI as a proxy, produced a negative sloping SML. This result suggested an inverse relationship between risk and return, which is contradictory to the theory set out in chapters two and three. Thus robustness tests were performed on the model, but none solved the problem. Next the proposed multifactor models were tested to see if they would enhance the results of the first model. Although the results improved slightly, they too did not solve the problem. Thus, in conclusion it was found that incorporating a bond index into the proxy for the market portfolio did not significantly enhance the use of the CAPM in South Africa.
The international capital asset pricing model : empirical evidence for South Africa.
(2011) Peerbhai, Faeezah.; Strydom, Barry Stephen.
An integral component of all corporations‘ financial operations is the determination of the cost of equity of the firm. This input is required in many financial decision making processes, and the correct estimation of this value is therefore a very important issue. The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has filled this gap since its inception, and has been extensively used by both corporations and individuals in their estimation of expected return. Whilst the standard form of this model is intuitive and simple in its implementation, an additional issue faced when utilising it in the current day is that of global financial integration. Whilst the CAPM is suitable for use in a market which is completely segmented from the rest of the world, this is often not the case as the barriers across countries have gradually declined, with the result that much of the world is now internationally integrated. This therefore led to two extensions of the CAPM to the international environment by both Solnik (1974) and Grauer, Litzenberger and Stehle (1976). Whilst both are referred to as International CAPM (ICAPM) models, the difference lies in that Solnik‘s (1974) model incorporates the presence of exchange rate risk, whilst the Grauer, Litzenberger and Stehle (1976) one does not. This study therefore provides an analysis of the suitability of these two models to the South African environment, along with a comparison of the relative performances of each model against that of the standard CAPM model. The three different methods of analysis used are: the unconditional approach, a conditional GARCH approach, as well as the cost of equity approach. The analyses are applied to the data which consists of all listed firms on the JSE from 1990 up to 2010, with multiple methods of evaluation employed, such as information criteria and forecasting, in order to provide a robust analysis of all three models. The results of the analysis vary across the different methods used, however since a significant amount of evidence was found of the International CAPM models, it can be concluded that an international asset pricing model should be used instead of a domestic one. In the choice between the single-factor ICAPM model and the multifactor ICAPMEX, even though use of the Grauer et al (1976) model would not be inappropriate, it was concluded that use of Solnik‘s (1974) ICAPMEX model would be the best suited to the South African financial environment, as the presence of exchange rate risk factors in an asset pricing model is found to be an important inclusion which may lead to better cost of equity estimates.
Testing the efficiency of the South African futures market for white maize : 1996-2006.
(2010) McCullough, Kerry-Ann Frances.; Strydom, Barry Stephen.
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