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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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:
Journal Article
Journal or Publication Title:
Journal of Futures Markets
Additional Information:
The definitive version is available at www3.interscience.wiley.com
Uncontrolled Keywords:
?? accounting and financefinancegeneral business,management and accountingeconomics and econometricsaccountingbusiness, management and accounting(all)discipline-based research ??
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Deposited On:
11 Jul 2011 18:27
Last Modified:
16 Jul 2024 08:53