Rights statement: The definitive version is available at www3.interscience.wiley.com
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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Risk management with options and futures under liquidity risk
AU - Adam-Müller, A F A
AU - Panaretou, A
N1 - The definitive version is available at www3.interscience.wiley.com
PY - 2009/4
Y1 - 2009/4
N2 - 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.
AB - 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.
U2 - 10.1002/fut.20362
DO - 10.1002/fut.20362
M3 - Journal article
VL - 29
SP - 297
EP - 318
JO - Journal of Futures Markets
JF - Journal of Futures Markets
SN - 0270-7314
IS - 4
ER -