Risk management with options and futures under liquidity risk
Futures hedging creates liquidity risk through marking to market. Liquidity risk matters if interim losses on a futures position have to be financed at a markup over the risk‐free rate. This study analyzes the optimal risk management and production decisions of a firm facing joint price and liquidity risk. It provides a rationale for the use of options on futures in imperfect capital markets. If liquidity risk materializes, the firm sells options on futures in order to partly cover this liquidity need. It is shown that liquidity risk reduces the optimal hedge ratio and that options are not normally used before a liquidity need actually arises. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:297–318, 2009
Year of publication: |
2009
|
---|---|
Authors: | Axel F. A. Adam‐Müller ; Panaretou, Argyro |
Published in: |
Journal of Futures Markets. - John Wiley & Sons, Ltd.. - Vol. 29.2009, 4, p. 297-318
|
Publisher: |
John Wiley & Sons, Ltd. |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Exports and hedging exchange rate risks: the multi‐country case
Axel F. A. Adam‐Müller, (2000)
-
Axel F. A. Adam‐Müller, (2002)
-
Corporate risk management and firm value: evidence from the UK market
Panaretou, Argyro, (2014)
- More ...