Risk Management with Default-Risky Forwards
AbstractTo study the impact of counter-party default risk of forward contracts on a firm’s production and hedging decisions, I use a model of a risk-averse competitive firm under price uncertainty. I find that if expected profits from forward contracts are zero, the hedge ratio is not affected by default risk under general preferences and general price distributions. My analysis shows that if the size of a firm’s forward position does not affect the counter-party’s default probability, default risk is no reason to reduce hedge ratios. However, a firm’s optimal output is negatively affected by default risk, and it is generally advisable to hedge default risk with credit derivatives.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by LMU Munich School of Management in its journal Schmalenbach Business Review.
Volume (Year): 62 (2010)
Issue (Month): 2 (April)
Default Risk; Forwards; Hedging; Production; Risk Management.;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Adam-Müller, Axel F.A. & Nolte, Ingmar, 2011. "Cross hedging under multiplicative basis risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2956-2964, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (sbr) The email address of this maintainer does not seem to be valid anymore. Please ask sbr to update the entry or send us the correct address.
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.