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The optimal derivative-based corporate hedging strategies under equity-linked managerial compensation

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  • Akron, Sagi

Abstract

The growing volume utilization of hedging instruments in emerging markets revives the debate regarding optimal hedging strategies–futures versus put options. Specifically, market perfection and the question of redundancy of the hedging instruments, i.e., commodity put options versus futures becomes extremely relevant. This study analyzes optimal hedging while crucially differentiating the principal-agent entities and preferences, and considering managerial equity-linked compensation. We demonstrate that, within the separation theorems frameworks, perfect substitution between commodity put options and exclusive futures hedging. Furthermore, the analysis validates multiple hedging instruments combinations, thereby rationalizing hedging devices diversity and volume for the sake of emerging markets stability.

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  • Akron, Sagi, 2019. "The optimal derivative-based corporate hedging strategies under equity-linked managerial compensation," Emerging Markets Review, Elsevier, vol. 41(C).
    • Handle: RePEc:eee:ememar:v:41:y:2019:i:c:s1566014118300013
    DOI: 10.1016/j.ememar.2019.100631
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    More about this item

    Keywords

    Corporate hedging devices; managerial compensation scheme; agency friction; separation theorems;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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