Post by Sapphire Capital on Aug 28, 2008 19:55:38 GMT 4
Risk Management with Options and Futures under Liquidity Risk
Axel F. A. Adam-Muller
University of Trier, FB IV - BWL; Lancaster University Management School
Argyro Panaretou
Lancaster University - Department of Accounting and Finance
Journal of Futures Markets, Forthcoming
Abstract:
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 paper analyzes the optimal risk management and production decisions of a firm facing joint price and liquidity risk. It provides a rationale for the use 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.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1234122
Axel F. A. Adam-Muller
University of Trier, FB IV - BWL; Lancaster University Management School
Argyro Panaretou
Lancaster University - Department of Accounting and Finance
Journal of Futures Markets, Forthcoming
Abstract:
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 paper analyzes the optimal risk management and production decisions of a firm facing joint price and liquidity risk. It provides a rationale for the use 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.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1234122