The optimal derivative-based corporate hedging strategies under equity-linked managerial compensation

Sagi Akron

Emerging Markets Review, 2019, vol. 41, issue C

Abstract: The growing volume utilization of hedging instruments in emerging markets revives the debate regarding optimal hedging strategies–futures versus put options. Specifically, market perfection and the question of redundancy of the hedging instruments, i.e., commodity put options versus futures becomes extremely relevant. This study analyzes optimal hedging while crucially differentiating the principal-agent entities and preferences, and considering managerial equity-linked compensation. We demonstrate that, within the separation theorems frameworks, perfect substitution between commodity put options and exclusive futures hedging. Furthermore, the analysis validates multiple hedging instruments combinations, thereby rationalizing hedging devices diversity and volume for the sake of emerging markets stability.

Keywords: Corporate hedging devices; managerial compensation scheme; agency friction; separation theorems (search for similar items in EconPapers)
JEL-codes: G13 G14 G31 G32 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:41:y:2019:i:c:s1566014118300013

DOI: 10.1016/j.ememar.2019.100631

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