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How do firms hedge in financial distress?

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  • Evan Dudley
  • Niclas Andrén
  • Håkan Jankensgård

Abstract

We examine how firms hedge in financial distress. Using hand‐collected data from oil and gas producers, we find that these firms hedge oil prices during periods of financial distress. Derivative portfolios in these firms are characterized by short put options. These positions are part of a composite three‐way (3W) collar strategy that combines buying put options and selling put and call options with differing strike prices. Because liquidity demand varies with the degree of financial distress, the 3W collar strategy preserves incentives for future growth.

Suggested Citation

  • Evan Dudley & Niclas Andrén & Håkan Jankensgård, 2022. "How do firms hedge in financial distress?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1324-1351, July.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:7:p:1324-1351
    DOI: 10.1002/fut.22336
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