Hedging under Counterparty Credit Uncertainty

This study investigates optimal production and hedging decisions for firms facing price risk that can be hedged with vulnerable contracts, i.e., exposed to nonhedgeable endogenous counterparty credit risk. When vulnerable forward contracts are the only hedging instruments available, the firm's...

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Bibliographic Details
Main Authors:	Mahul, Olivier, Cummins, J. David
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Contingent Pricing Futures Pricing option pricing G130 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320
Online Access:	http://hdl.handle.net/10986/4736

id	okr-10986-4736
recordtype	oai_dc
spelling	okr-10986-47362021-04-23T14:02:19Z Hedging under Counterparty Credit Uncertainty Mahul, Olivier Cummins, J. David Contingent Pricing Futures Pricing option pricing G130 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 This study investigates optimal production and hedging decisions for firms facing price risk that can be hedged with vulnerable contracts, i.e., exposed to nonhedgeable endogenous counterparty credit risk. When vulnerable forward contracts are the only hedging instruments available, the firm's optimal level of production is lower than without credit risk. Under plausible conditions on the stochastic dependence between the commodity price and the counterparty's assets, the firm does not sell its entire production on the vulnerable forward market. When options on forward contracts are also available, the optimal hedging strategy requires a long put position. This provides a new rationale for the hedging role of options in the over-the-counter markets exposed to counterparty credit risk. 2012-03-30T07:29:29Z 2012-03-30T07:29:29Z 2008 Journal Article Journal of Futures Markets 02707314 http://hdl.handle.net/10986/4736 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Contingent Pricing Futures Pricing option pricing G130 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320
spellingShingle	Contingent Pricing Futures Pricing option pricing G130 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Mahul, Olivier Cummins, J. David Hedging under Counterparty Credit Uncertainty
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	This study investigates optimal production and hedging decisions for firms facing price risk that can be hedged with vulnerable contracts, i.e., exposed to nonhedgeable endogenous counterparty credit risk. When vulnerable forward contracts are the only hedging instruments available, the firm's optimal level of production is lower than without credit risk. Under plausible conditions on the stochastic dependence between the commodity price and the counterparty's assets, the firm does not sell its entire production on the vulnerable forward market. When options on forward contracts are also available, the optimal hedging strategy requires a long put position. This provides a new rationale for the hedging role of options in the over-the-counter markets exposed to counterparty credit risk.
format	Journal Article
author	Mahul, Olivier Cummins, J. David
author_facet	Mahul, Olivier Cummins, J. David
author_sort	Mahul, Olivier
title	Hedging under Counterparty Credit Uncertainty
title_short	Hedging under Counterparty Credit Uncertainty
title_full	Hedging under Counterparty Credit Uncertainty
title_fullStr	Hedging under Counterparty Credit Uncertainty
title_full_unstemmed	Hedging under Counterparty Credit Uncertainty
title_sort	hedging under counterparty credit uncertainty
publishDate	2012
url	http://hdl.handle.net/10986/4736
_version_	1764392558835793920

Hedging under Counterparty Credit Uncertainty

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