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Article: Liquidity risk and the hedging role of options

TitleLiquidity risk and the hedging role of options
Authors
Issue Date2006
PublisherJohn Wiley & Sons, Inc. The Journal's web site is located at http://www.interscience.wiley.com/jpages/0270-7314/
Citation
Journal Of Futures Markets, 2006, v. 26 n. 8, p. 789-808 How to Cite?
AbstractThis study examines the impact of liquidity risk on the behavior of the competitive firm under price uncertainty in a dynamic two-period setting. The firm has access to unbiased one-period futures and option contracts in each period for hedging purposes. A liquidity constraint is imposed on the firm such that the firm is forced to terminate its risk management program in the second period whenever the net loss due to its first-period hedge position exceeds a predetermined threshold level. The imposition of the liquidity constraint on the firm is shown to create perverse incentives to output. Furthermore, the liquidity constrained firm is shown to purchase optimally the unbiased option contracts in the first period if its utility function is quadratic or prudent. This study thus offers a rationale for the hedging role of options when liquidity risk prevails. © 2006 Wiley Periodicals, Inc.
Persistent Identifierhttp://hdl.handle.net/10722/85596
ISSN
2015 Impact Factor: 0.698
2015 SCImago Journal Rankings: 0.520
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.contributor.authorXu, Jen_HK
dc.date.accessioned2010-09-06T09:06:59Z-
dc.date.available2010-09-06T09:06:59Z-
dc.date.issued2006en_HK
dc.identifier.citationJournal Of Futures Markets, 2006, v. 26 n. 8, p. 789-808en_HK
dc.identifier.issn0270-7314en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85596-
dc.description.abstractThis study examines the impact of liquidity risk on the behavior of the competitive firm under price uncertainty in a dynamic two-period setting. The firm has access to unbiased one-period futures and option contracts in each period for hedging purposes. A liquidity constraint is imposed on the firm such that the firm is forced to terminate its risk management program in the second period whenever the net loss due to its first-period hedge position exceeds a predetermined threshold level. The imposition of the liquidity constraint on the firm is shown to create perverse incentives to output. Furthermore, the liquidity constrained firm is shown to purchase optimally the unbiased option contracts in the first period if its utility function is quadratic or prudent. This study thus offers a rationale for the hedging role of options when liquidity risk prevails. © 2006 Wiley Periodicals, Inc.en_HK
dc.languageengen_HK
dc.publisherJohn Wiley & Sons, Inc. The Journal's web site is located at http://www.interscience.wiley.com/jpages/0270-7314/en_HK
dc.relation.ispartofJournal of Futures Marketsen_HK
dc.rightsThe Journal of Futures Markets. Copyright © John Wiley & Sons, Inc.en_HK
dc.titleLiquidity risk and the hedging role of optionsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0270-7314&volume=26&spage=789&epage=808&date=2006&atitle=Liquidity+Risk+and+the+Hedging+Role+of+Optionsen_HK
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1002/fut.20217en_HK
dc.identifier.scopuseid_2-s2.0-33746189356en_HK
dc.identifier.hkuros134720en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-33746189356&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume26en_HK
dc.identifier.issue8en_HK
dc.identifier.spage789en_HK
dc.identifier.epage808en_HK
dc.identifier.isiWOS:000238736000003-
dc.publisher.placeUnited Statesen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.scopusauthoridXu, J=14046331900en_HK

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