12,000

We have over 12,000 students, from over 100 countries, within one of the safest campuses in the UK

93%

93% of Lancaster students go into work or further study within six months of graduating

Home > Research > Publications & Outputs > Risk management with options and futures under ...
View graph of relations

« Back

Risk management with options and futures under liquidity risk

Research output: Contribution to journalJournal article

Published

Journal publication date04/2009
JournalJournal of Futures Markets
Journal number4
Volume29
Number of pages22
Pages297-318
Original languageEnglish

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.

Bibliographic note

The definitive version is available at www3.interscience.wiley.com