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Risk management with options and futures under liquidity risk

Adam-Müller, A F A and Panaretou, A (2009) Risk management with options and futures under liquidity risk. Journal of Futures Markets, 29 (4). pp. 297-318. ISSN 0270-7314

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    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.

    Item Type: Article
    Journal or Publication Title: Journal of Futures Markets
    Additional Information: The definitive version is available at www3.interscience.wiley.com
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 45168
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 19:27
    Refereed?: Yes
    Published?: Published
    Last Modified: 09 Apr 2014 22:29
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/45168

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