IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v29y2009i4p297-318.html
   My bibliography  Save this article

Risk management with options and futures under liquidity risk

Author

Listed:
  • Axel F. A. Adam‐Müller
  • Argyro Panaretou

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 Periodicals, Inc. Jrl Fut Mark 29:297–318, 2009

Suggested Citation

  • Axel F. A. Adam‐Müller & Argyro Panaretou, 2009. "Risk management with options and futures under liquidity risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(4), pages 297-318, April.
    • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:4:p:297-318
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Akron, Sagi, 2019. "The optimal derivative-based corporate hedging strategies under equity-linked managerial compensation," Emerging Markets Review, Elsevier, vol. 41(C).
    2. Beccarini, Andrea, 2014. "Solving the liquidity constraint by options on futures," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 116-120.
    3. Elisson Andrade & Fabio Mattos & Roberto Arruda de Souza Lima, 2018. "New Insights on Hedge Ratios in the Presence of Stochastic Transaction Costs," Risks, MDPI, vol. 6(4), pages 1-15, October.
    4. Marin Bozic, 2010. "Pricing Options on Commodity Futures: The Role of Weather and Storage," Working Papers 1003, The Institute of Economics, Zagreb.
    5. Korn, Olaf & Rieger, Marc Oliver, 2016. "Hedging with regret," CFR Working Papers 16-06, University of Cologne, Centre for Financial Research (CFR).
    6. Korn, Olaf & Merz, Alexander, 2016. "How to hedge if the payment date is uncertain?," CFR Working Papers 07-14 [rev.], University of Cologne, Centre for Financial Research (CFR).
    7. Korn, Olaf & Rieger, Marc Oliver, 2019. "Hedging with regret," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 192-205.
    8. Benzennou, Bouchra & ap Gwilym, Owain & Williams, Gwion, 2020. "Commonality in liquidity across options and stock futures markets," Finance Research Letters, Elsevier, vol. 32(C).
    9. Olaf Korn & Alexander Merz, 2019. "How to hedge if the payment date is uncertain?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 481-498, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:29:y:2009:i:4:p:297-318. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.