We examine the relationship between derivatives hedging, risk-taking, and managerial compensation incentives from an enterprise risk management perspective in U.S. publicly traded property-liability insurance companies. We find that derivatives usage is negatively related to various risks, supporting the stabilizing effect of derivatives use for hedging purposes. Our evidence also shows that de...

This paper estimates optimal hedging ratios for a Finnish spring wheat producer under price and yield uncertainty. The contract available for hedging fixes the price and quantity at the time of sowing for a delivery at harvest. Autoregressive models are used to obtain point forecasts for the conditional mean price and price volatility at harvest. Expected yield and yield volatility are estimate...

The values of life insurance and annuity liabilities move in opposite directions in response to a change in the underlying mortality. Natural hedging utilizes this to stabilize aggregate liability cash flows. Our study shows empirical evidence that insurers who utilize natural hedging also charge lower premiums than otherwise similar insurers. This indicates that insurers who are able to utiliz...

In the broad literature of corporate risk management classic models of optimal hedging assume a one-period hedging decision, and therefore no financing need arises to maintain the hedge position. The multi-period models are usually based on the assumption of no liquidity constraints, and accordingly the eventual financing need can always be met from the market. As a consequence of the recent cr...

This paper addresses quantity risk in the electricity market and explores several ways of managing such risk. The paper also addresses the hedging problem of a load-serving entity, which provides electricity service at a regulated price in electricity markets with price and quantity risk. Exploiting the correlation between consumption volume and spot price of electricity, an optimal zero-cost h...

A joint fractionally integrated, error-correction andmultivariateGARCH (FIEC-BEKK) approach is applied to investigate hedging effectiveness using daily data 1995–2005. The findings reveal the proxied error-correction term has a long memory component that theoretically should affect hedging effectiveness.When the FIECmodel empirical conditions are satisfied, the FIEC-BEKK hedging strategy outper...

This paper addresses the optimization of the continuous-flow model of a single-stage single-product manufacturing system with constant demand and transportation delay from the machine to the inventory. The machine is subject to either time-dependent or operation-dependent failures. The production is controlled by a hedging point policy. The goal is to determine the optimal hedging point, which ...

This paper considers the pricing and hedging of collateralized debt obligations (CDOs). CDOs are complex derivatives on a pool of credits which we choose to analyse in the top down model proposed in Filipović et al. [4]. We reflect on the implied forward rates and bring them in connection with the top-down framework in Lipton and Shelton [8] and Schönbucher [11]. Moreover, we derive variance-mi...

We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge. Based on a lea...

We present a new primal-dual algorithm for computing the value of the Lagrangian 6 dual of a stochastic mixed-integer program (SMIP) formed by relaxing its nonanticipativity con7 straints. The algorithm relies on the well-known progressive hedging method, but unlike previous 8 progressive hedging approaches for SMIP, our algorithm can be shown to converge to the optimal 9 Lagrangian dual value....