How do Firms Hedge in Financial Distress?

65 Pages Posted: 20 Apr 2022

See all articles by Evan Dudley

Evan Dudley

Queen's University - Smith School of Business

Niclas Andrén

Lund University - Department of Business Administration

Håkan Jankensgård

Stockholm University - Stockholm Business School

Date Written: March 17, 2022

Abstract

We examine how firms hedge in financial distress. Using hand-collected data from oil and gas producers, we find that derivative portfolios in these firms are characterized by short put options. These positions are part of a composite three-way collar strategy that combines buying put options and selling put and call options with differing strike prices. We show that because liquidity demand varies with the degree of financial distress, the three-way collar strategy is the optimal risk management strategy that preserves incentives for future growth.

Keywords: corporate hedging; risk management; financial distress; economic distress

JEL Classification: G30, G32

Suggested Citation

Dudley, Evan and Andrén, Niclas and Jankensgård, Håkan, How do Firms Hedge in Financial Distress? (March 17, 2022). Available at SSRN: https://ssrn.com/abstract=4060171 or http://dx.doi.org/10.2139/ssrn.4060171

Evan Dudley (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

Niclas Andrén

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Håkan Jankensgård

Stockholm University - Stockholm Business School ( email )

Sweden

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