Hedging price risk when real wealth matters

Hedging Price Risk When Real Wealth Matters

This paper analyzes optimal hedging of a tradable risk (e.g. price risk or exchange rate risk) with forward contracts in the presence of untradable in ation risk. Utility is de ned over real wealth. Optimal forward positions are derived relative to a given initial exposure in the tradable risk. A nominally unbiased forward market usually implies a non-zero real risk premium and hence some risk ...

Robust Recovery Risk Hedging: Only the First Moment Matters

Credit derivatives are subject to at least two sources of risk: the default time and the recovery payment. This paper examines the impact of modeling the recovery payment on hedging strategies in a reduced-form model as well as a Merton-type model. We show that quadratic hedging approaches do only depend on the expected recovery payment at default and not the whole shape of the recovery payment...

Robust Recovery Risk Hedging: Only the First Moment Matters

Hedging credit: Equity liquidity matters

a r t i c l e i n f o a b s t r a c t We theorize and confirm a new channel by means of which liquidity costs are embedded in CDS spreads. We show that credit default swap (CDS) spreads are directly related to equity market liquidity in the Merton [Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. J. Finance 29, 449–470] model via hedging. We confirm th...

Risk hedging in a supply chain: Option vs. price discount

In this research, two risk hedging strategies, the option contract and the advance purchase discount contract, are investigated within a manufacturer–retailer two-echelon supply chain context. This study offers three contributions. First, the optimal decisions under the two contracts from the perspectives of both the manufacturer and the retailer are determined. Second, circumstances under whic...