Does Hedging with Derivatives Reduce the Market's Perception of Credit Risk?
Sriya Anbil,
Alessio Saretto and
Heather Tookes
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Sriya Anbil: https://www.federalreserve.gov/econres/sriya-l-anbil.htm
No 2016-100, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
Abstract:
Risk management is the most widely-cited reason that non-financial corporations use derivatives. If hedging programs are effective, then firms using derivatives should have lower credit risk than those that do not. Surprisingly, we find that firms with derivative positions without a hedge accounting designation (typically higher basis risk) have higher CDS spreads than firms that do not hedge at all. We do not find evidence that these non-designated positions are associated with future credit realizations. We examine alternative explanations and find evidence that is consistent with a market penalty for high basis risk positions when overall market conditions are poor.
Keywords: Counterparty credit risk; Derivatives, futures, and options; Risk management; Hedging (search for similar items in EconPapers)
Pages: 56 pages
Date: 2016-07-20
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-100
DOI: 10.17016/FEDS.2016.100
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