Risk Measurement and Hedging: With and Without Derivatives

Mitchell Petersen and S. Ramu Thiagarajan

Financial Management, 2000, vol. 29, issue 4

Abstract: This paper examines a setting in which the derivatives strategies of two firms are known, but completely different. One firm aggressively hedges its risk using derivatives. The other firm uses a combination of operating and financial decisions, but no derivatives, to manage its risk. The different choice of methods is a result of different abilities to adjust operating costs and different needs for investment capital. Managerial incentives also play a role. Although risk-averse managers have an incentive to reduce risk, how and how much they hedge depends on how they are compensated.

Date: 2000
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