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The Use of Options in Corporate Risk Management

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Author Info
Bartram, Söhnke M.

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Abstract

This paper investigates the motivations and practice of nonfinancial firms with regard to using financial options in their risk management activities. To this end, it provides a comprehensive account of the existing empirical evidence on the use of derivatives in general and options in particular by nonfinancial corporations across different underlyings and countries. Overall, a significant number of 15%-25% of the firms outside the financial sector use financial options. This reflects the fact that options are very versatile risk management instruments that can be used to hedge various types of exposures, linear as well as nonlinear. In particular, options are a useful component of corporate risk management if exposures are uncertain, e.g. due to price and quantity risk. Depending on the correlation between price and quantity risk, the optimal hedge portfolio consists of a varying combination of linear and nonlinear risk management instruments. Moreover, the accounting treatment as well as liquidity effects can impact the choice of derivative instrument. At the same time, there may be agency-related incentives to use options because of their role to present dual bets on both direction as well as future volatility of the underlying.

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File URL: http://mpra.ub.uni-muenchen.de/6663/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6663.

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Date of creation: 07 Jan 2004
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Handle: RePEc:pra:mprapa:6663

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Related research
Keywords: Options; derivatives; risk management; exposure; corporate finance;

Find related papers by JEL classification:
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
F3 - International Economics - - International Finance
G3 - Financial Economics - - Corporate Finance and Governance

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
  16. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July. [Downloadable!] (restricted)
  17. Sohnke M. Bartram & Gregory W. Brown & Frank R. Fehle, 2003. "International Evidence on Financial Derivatives Usage," Finance 0307003, EconWPA, revised 24 Jul 2003. [Downloadable!]
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  24. Bartram, S.M., 2000. "Corporate Risk Management as a Lever for Shareholder Value Creation," Papers 00-58, Southern California - School of Business Administration.
    Other versions:
  25. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aretz, Kevin & Bartram, Söhnke M., 2009. "Corporate Hedging and Shareholder Value," MPRA Paper 14088, University Library of Munich, Germany. [Downloadable!]
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