Applications of financial hedging in the hospitality and tourism industry

Chun-Hung Tang, Purdue University

Abstract

This dissertation consists of three studies of the applications of financial hedging in the hospitality and tourism industry. In the first study presented in chapter 2, the author proposes a novel approach to mitigate the cash flow volatility arising from snowfall fluctuation in ski resorts: using snowfall index based forwards. Based on the historical data and Monte Carlo simulation, the results demonstrate that snow index forwards could effectively hedge some of the cash flow risk and that hedging effectiveness is at its best during the peak season. The second study in chapter 3 examines the effect of geographical diversification on risk exposure to snowfall risk and the hedging effectiveness of snowfall forwards proposed in chapter 2. Analysis of historical data shows geographically diversified ski resorts have smaller exposure to individual snowfall risk, which could be the main reason that the hedging effectiveness of local snowfall index forwards is smaller in geographically diversified firms. The results of the simulation based on a hypothetical two-property ski resort also suggest that, from a risk reduction point of view, the best property to be acquired would be the one whose basis is positively correlated with the existing basis and negatively correlated with the existing snowfall. The third study in chapter 4 switches gears to investigate the effects of leverage and growth opportunities on the extent of hedging under different levels of financial distress. Contrary to the theories, the results indicate that there is no endogeneity between the extent of hedging and leverage in hotels. This study also finds that relative to hotels with a lower level of financial distress, hotels with a higher level of financial distress hedge less when leverage increases and they also reduce short positions as growth opportunities increases. Finally, the results from Heckman’s two-step models also indicate that the determinants for the decision to hedge and the extent of hedging could be different.

Degree

Ph.D.

Advisors

Jang, Purdue University.

Subject Area

Business administration|Finance|Recreation

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