This paper examines how financially constrained firms should hedge and what instruments to use under default risk and a debt contract which is characterized by an endogenous collateral. We find that in addition to futures, non-linear derivatives in the form of short butterfly options are required, as long as the default cost is sufficiently large.
The hedging role of futures and butterfly options: a note.
AGLIARDI, ELETTRA
2006
Abstract
This paper examines how financially constrained firms should hedge and what instruments to use under default risk and a debt contract which is characterized by an endogenous collateral. We find that in addition to futures, non-linear derivatives in the form of short butterfly options are required, as long as the default cost is sufficiently large.File in questo prodotto:
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