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Risk Management with Supply Contracts

Listed author(s):
  • Heitor Almeida
  • Kristine Watson Hankins
  • Ryan Williams

Purchase obligations are forward contracts with suppliers and are used more broadly than traded commodity derivatives. This paper is the first to document that these contracts are a risk management tool and have a material impact on corporate hedging activity. Firms that expand their risk management options following the introduction of steel futures contracts substitute financial hedging for purchase obligations. Contracting frictions – such as bargaining power and settlement risk – as well as potential hold-up issues associated with relationship-specific investment affects the use of purchase obligations in the cross-section as well as how firms respond to the introduction of steel futures.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23331.

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Date of creation: Apr 2017
Handle: RePEc:nbr:nberwo:23331
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