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| Author: | Korn, O. |
| Title: | Liquidity risk and hedging decisions |
| Journal: | Zeitschrift für Betriebswirtschaft
2004 : AUG, VOL. 74:8, p. 837-857 |
| Index terms: | finance hedging liquidity risk management decision making models |
| Language: | eng |
| Abstract: | In over-the-counter (OTC) markets, there is a tendency to revalue derivatives positions prior to maturity requiring collateral (hereafter as: coll.) in the case of losses. These coll. requirements create an asymmetric liquidity risk (here as: liq-risk). Using a model of a risk-averse competitive firm under price uncertainty, this paper takes into account the liq-risk. of forward contracts, deriving bounds on optimal hedge positions in forwards and on optimal output. Through a comparative static analysis, optimal risk management policies are related to characteristics of the firm. It is shown that liq-risk. can have a significant impact on forward positions even for firms with high credit standing. The total impact consists of a hedge ratio effect and an output effect. |
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