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Financial exposure and technology innovation investment

Financial exposure and technology innovation investment PurposeThe purpose of this paper is to identify, measure and optimise financial risk and its effect on returns from innovation projects on an accrual basis and on a cash basis in a commodity industry.Design/methodology/approachA hypothetical case study, based on a real case, of a petrochemical commodity industry in Brazil was analysed with commodities pricing rules based on actual contracts. Earnings at risk (EaR) and cash flow at risk (CFaR) measures were applied, as well as a metric proposed in this paper called cash balance at risk (CBaR).FindingsThe paper demonstrates that financial risk measurement and optimisation are important issues in the decision-making process in the petrochemical industry. EaR, CFaR and CBaR measures are helpful when used alongside standard procedures of project evaluation. The findings also show that innovative technologies, in certain conditions, may act as “natural hedging”. It was found that the time delay between revenues and expenses leads to financial risk exposure to changes in prices and foreign exchange rates. Projects can use financing and hedging to boost their results.Originality/valueAn innovative project was compared with an expansion project in a petrochemical industry. A model for petrochemical commodities contract pricing was added in an analysis that included financing and hedging. The findings in this paper suggest that it is important to consider financial risk measures in project evaluation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Academia Revista Latinoamericana de Administración Emerald Publishing

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1012-8255
DOI
10.1108/ARLA-06-2016-0165
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to identify, measure and optimise financial risk and its effect on returns from innovation projects on an accrual basis and on a cash basis in a commodity industry.Design/methodology/approachA hypothetical case study, based on a real case, of a petrochemical commodity industry in Brazil was analysed with commodities pricing rules based on actual contracts. Earnings at risk (EaR) and cash flow at risk (CFaR) measures were applied, as well as a metric proposed in this paper called cash balance at risk (CBaR).FindingsThe paper demonstrates that financial risk measurement and optimisation are important issues in the decision-making process in the petrochemical industry. EaR, CFaR and CBaR measures are helpful when used alongside standard procedures of project evaluation. The findings also show that innovative technologies, in certain conditions, may act as “natural hedging”. It was found that the time delay between revenues and expenses leads to financial risk exposure to changes in prices and foreign exchange rates. Projects can use financing and hedging to boost their results.Originality/valueAn innovative project was compared with an expansion project in a petrochemical industry. A model for petrochemical commodities contract pricing was added in an analysis that included financing and hedging. The findings in this paper suggest that it is important to consider financial risk measures in project evaluation.

Journal

Academia Revista Latinoamericana de AdministraciónEmerald Publishing

Published: Nov 6, 2017

References