publication . Article . 2009

Risk management with options and futures under liquidity risk

Name: Risk management with options and futures under liquidity risk
Keywords: Economics and Econometrics, Accounting, General Business, Management and Accounting, Finance

Argyro Panaretou; Axel F.A. Adam-Müller; Axel F.A. Adam-Müller;

Open Access

Published: 01 Apr 2009 Journal: SSRN Electronic Journal (eissn: 1556-5068,

Publisher: Elsevier BV

Country: United Kingdom

Summary

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 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 Perio...

doi: 10.2139/ssrn.1100086 , 10.1002/fut.20362 , 10.2139/ssrn.1107506

Subjects

free text keywords: Economics and Econometrics, Accounting, General Business, Management and Accounting, Finance, Liquidity crisis, Risk management, business.industry, business, Economics, Market liquidity, Financial economics, Financial risk management, Futures contract, Liquidity risk, Hedge (finance), Liquidity premium

Related Organizations